GIFT   OF 
MICHAEL  REESE 


t 


THE    SHIFTING   AND   INCIDENCE 
OF   TAXATION 


BY 


EDWIN    R.   A.    SELIGMAN 

PROFESSOR  OF  POLITICAL  ECONOMY  AND  FINANCE 
COLUMBIA  UNIVERSITY 


SECOND  EDITION 
COMPLETELY  REVISED  AND  ENLARGED 


f0NIVERSITT 
\0, 


PUBLISHED  FOR  THE  COLUMBIA  UNIVERSITY  PRESS  BY 

THE    MACMILLAN   COMPANY 

LONDON:  MACMILLAN  &  CO.,  LTD. 
1899 

All  rights  reserved 


COPYRIGHT,  1899, 
BY  THE  MACMILLAN  COMPANY. 


J.  8.  Gushing  &  Co.  -  Berwick  ft  Smith 
Norwood  Mais.  U.S.A. 


PREFACE   TO   THE   SECOND   EDITION 

IN  this  edition  so  many  changes  have  been  made  as  to 
constitute  practically  a  new  volume.  The  alterations  and 
additions  are  to  be  found  in  both  the  historical  and  the  posi- 
tive parts.  A  more  careful  study  of  the  early  English  litera- 
ture brought  to  light  so  much  interesting  material  on  the 
theory  of  taxation  that  the  entire  Book  First  of  Part  One 
has  been  devoted  to  it ;  whereas,  in  the  earlier  edition,  the 
whole  period  was  passed  over  in  a  few  pages.  This  book 
is  therefore  substantially  new.  In  the  Second  Book  a  chap- 
ter has  been  added  on  the  Physiocrats,  the  last  chapter  on 
the  Mathematical  Theory  has  been  rewritten,  and  considera- 
ble additions  have  been  made  to  some  of  the  other  chapters. 
In  Part  Two,  devoted  to  the  Positive  Theory,  a  chapter  has 
been  inserted  on  the  general  principles,  chapter  five  has  been 
entirely  rewritten,  chapter  seven  has  been  amplified  by  a 
closer  study  of  import  duties  and  stamp  taxes,  and  chapters 
two  and  three  have  been  enlarged  and  amended.  The  whole 
work  has  been  so  completely  revised  that  scarcely  a  single 
page  will  be  found  the  same  as  in  the  first  edition.  Finally, 
a  bibliography  and  an  index  have  been  added.  It  is  hoped 
that  these  changes  will  ensure  for  this  new  edition  a  recep- 
tion as  favorable  as  that  which  has  been  unexpectedly  ac- 
corded to  the  original  work. 

In  preparing  this  edition  I  have  received  great  help  from 
my  colleagues.  Professors  John  B.  Clark  and  Richmond 


vi  Preface 

Mayo-Smith  have  aided  me  with  valuable  criticisms.  To  Mr. 
Arthur  M.  Day  I  owe  much  for  helpful  suggestions  in  detail 
as  to  both  matter  and  form  from  the  beginning  to  the  close 
of  the  work.  From  other  friends  also  I  have  derived  assist- 
ance. Professor  Ross  of  Leland  Stanford  University  and 
Professor  Hull  of  Cornell  University  have  laid  me  under 
obligations  by  calling  attention  to  desirable  changes  and 
additions  in  the  text.  Professor  Marshall  of  Cambridge  and 
Professor  Edgeworth  of  Oxford  have  been  kind  enough  to 
point  out  some  blemishes  and  possible  improvements.  Finally, 
Mr.  George  W.  Morgan  has  undertaken  the  very  arduous 
task  of  aiding  me  to  read  the  entire  prpof . 


EDWIN  R.  A.  SELIGMAN. 


COLUMBIA  UNIVERSITY,  N.Y. 
December,  1898. 


TABLE   OF  CONTENTS 

INTRODUCTION 

PAGB 

Terminology :  Shifting,  Incidence,  Evasion,  Effect  i 

PART   I 
THE  HISTORY  OF  THE  DOCTRINE  OF  INCIDENCE 

BOOK  I 
THE  EARLY  THEORIES 

CHAPTER  I 
THOSE  WHO  DISCUSS  THE  GENERAL  EXCISE 

The  Origin:  Hobbes,  Cradock,  Culpeper II 

1.  The  Theory  that  the  Excise  does  not  rest  on  the  Poor  Consumers. 

Mun,  Waterhouse,  Fauquier 13 

2.  The  Theory  that  the  Excise  rests  on  Consumers  in  general. 

Petty,  Burnaby,  Sheridan,  Nickolls,  Manley,  Houghton,  Tem- 
ple, De  Witt,  Tucker,  Young,  Temple,  Child,  Gary,  Nugent, 
Vanderlint,  Postlethwayt,  Forster 18 

3.  The  Theory  that  the  Excise  is  shifted  to  the  Landowners. 

Anonymous  writers,  Pulteney,  D'Anvers          ....      46 

4.  The  Theory  that  the  Excise  rests  on  the  Traders. 

Anonymous  writers,  Roberts,  Ashley 49 

CHAPTER  II 
THOSE  WHO  FAVOR  A  SINGLE  TAX  ON  LUXURIES 

Chamberlayne,  Richardson,  Tucker,  Nickolls,  Forster        .         .         •       55 

vii 


viii  Table  of  Contents 

CHAPTER  III 
THOSE  WHO  FAVOR  A  SINGLE  TAX  ON  HOUSES 

PACK 

Decker,  Postlethwayt,  Fauquier,  Horsley ;  Massie,  Young ...      60 

CHAPTER  IV 

THOSE  WHO  FAVOR  A  GENERAL  PROPERTY  TAX 
Culpeper,  De  Foe,  Drake,  Wagstaffe 66 

CHAPTER  V 

THOSE  WHO  FAVOR  A  SINGLE  TAX  ON  LAND 
Locke,  Davenant,  Asgill,  Cantillon,  Wood,  Vanderlint      ...      71 

CHAPTER  VI 

THOSE  WHO  FAVOR  A  MORE  ECLECTIC  SYSTEM 
Walpole,  Reynell,  Nugent,  Hume,  Steuart,  Stewart,  Young       .        .      79 


BOOK  II 
THE  MODERN  THEORIES 

CHAPTER   I 
THE  PHYSIOCRATIC  THEORY 

Quesnay,  Mirabeau,  Mercier  de  la  Riviere,  Du  Pont  de  Nemours, 

Baudeau,  Le  Trosne,  Turgot ;  Franklin,  Hamilton  95 

CHAPTER  II 

THE  ABSOLUTE  THEORY 

Adam  Smith,  Ricardo 113 


Table  of  Contents  ix 


CHAPTER  III 
THE  EQUAL-DIFFUSION  THEORY 

FACE 

The  Optimists. 

Verri,  Mansfield,  Dickson,  Young;  Canard,  Courcelle-Seneuil, 
Cherbuliez,  Prittwitz,  Thiers,  De  Broglie,  Stein ;  Montgomery, 
Gibbon,  Wells,  Sherman,  Cooley 122 

The  Pessimists. 

Proudhon;  Bolles 134 

CHAPTER  IV 
THE  CAPITALIZATION  THEORY 

Young,  Craig,  Sartorius,  Hoffmann,  Murhard,  Passy,  Wolowski, 
Destutt  de  Tracy,  Du  Puynode,  Baxter,  Noble,  Rau,  Schaffle, 
Pierson 137 

CHAPTER  V 
THE  ECLECTIC  THEORY 

J.-B.  Say,  Sismondi,  Gamier,  Parieu,  Du  Puynode,  Vignes,  Leroy- 
Beaulieu ;  v.  Thlinen,  Rau,  Hock,  Prince- Smith ;  Jones, 
Buchanan,  J.  Mill,  Senior,  McCulloch,  J.  S.  Mill,  Fawcett, 
ClifFe-Leslie 146 

CHAPTER  VI 

THE  AGNOSTIC  THEORY 
Held 161 

CHAPTER  VII 

THE  SOCIALISTIC  THEORY 
Lassalle,  Shearman 163 

CHAPTER  VIII 
THE  QUANTITATIVE  OR  MATHEMATICAL  THEORY 

Cournot,  Fauveau,  Jenkin,  Pantaleoni,  Walras,  Wicksell,  Conigliani, 

Barone,  Marshall,  Edge  worth 165 


x  Table  of  Contents 

PART   II 

THE  DOCTRINE  OF  INCIDENCE 

CHAPTER  I 
GENERAL  PRINCIPLES 

PAGE 

General  considerations 179 

Is  the  commodity  durable  or  perishable? 181 

Is  the  commodity  subject  to  the  law  of  monopoly  or  that  of 

competition? 186^ 

Is  the  tax  general  or  exclusive? 187 

Is  there  complete  mobility  of  capital  ? 187 

Is  the  demand  for  the  commodity  elastic? 188 

To  what  extent  do  differential  advantages  of  production  affect  the 

supply? 192 

What  is  the  ratio  of  product  to  cost  ? 199 

Is  the  tax  imposed  on  margin  or  on  surplus  ?      .         .         .         .213 

Is  the  tax  large  or  small  ? 215 

Is  the  tax  proportional  or  progressive?        .         .         .         .         .216 

Is  the  commodity  a  final  good  ? 217 

Conclusions 218 

CHAPTER  II 
TAXES  ON  AGRICULTURAL  LAND 

General  considerations 220 

Taxes  on  economic  rent 222 

Uniform  taxes  according  to  the  quantity  or  the  quality  of  the 

land 224 

Taxes  on  gross  product 226 

Taxes  on  agricultural  profits 227 

Taxes  on  property  or  selling  value 227 

Taxes  on  rental  value 231 

CHAPTER   III 
TAXES  ON  URBAN  REAL  ESTATE 

General  considerations 233 

Taxes  on  the  ground  owners 236 

Taxes  on  the  house  owners 238 

Taxes  on  the  owners  of  house  and  ground          ....  244 

Taxes  on  the  occupiers 246 


Table  of  Contents  xi 

CHAPTER  IV 

K 

TAXES  ON  PERSONAL  PROPERTY  AND  CAPITAL 

PAGE 

Uniform  taxes  on  capital 260 

Unequal  taxes  on  capital 263 

1.  Incidence  as  between  the  original  owner  and  the  new  pur- 

chaser         263 

2.  Incidence  as  between  the  lender  and  the  borrower         .        .  264 

3.  Incidence  as  between  the  producer  and  the  consumer    .        .  268 

CHAPTER  V 
TAXES  ON  PROFITS 

Taxes  on  gross  product 270 

Taxes  on  competitive  enterprises 271 

Taxes  on  monopolies 273 

Ultimate  effects 278 

Excess-of-tax-above-price  doctrine 281 

Taxes  on  gross  receipts 285 

Under  competitive  conditions     .......  285 

Under  monopoly  conditions       .......  286 

Taxes  on  net  receipts 288 

Taxes  of  fixed  amount 292 

Application 294 

CHAPTER  VI 
TAXES  ON  WAGES 

Taxes  on  professional  earnings          . ' 295 

Taxes  on  ordinary  wages  .........  297 

CHAPTER  VII 
OTHER  TAXES 

Poll  taxes 299 

Inheritance  taxes 299 

Excise  taxes 300 

Import  and  export  duties 300 

Stamp  taxes 304 

Income  taxes 307 


xii  Table  of  Contents 

CHAPTER  VIII 
CONCLUSION 

Optimism  and  Pessimism 

General  tendencies ,jj 

Advice  to  legislators 

BIBLIOGRAPHY 

Works  prior  to  Adam  Smith ,I7 

Works  since  Adam  Smith 


INDEX  OF  AUTHORS 


INTRODUCTION 


THE  problem  of  the  incidence  of  taxation  is  one  of  the 
most  neglected,  as  it  is  one  of  the  most  complicated,  subjects 
in  economic  science.  It  has  indeed  been  treated  by  many 
writers ;  but  its  discussion  in  scientific  literature,  as  well  as 
in  everyday  life,  has  frequently  been  marked  by  what  Parieu 
calls  the  "  simplicity  of  ignorance."  Yet  no  topic  in  public 
finance  is  more  important ;  for,  in  every  system  of  taxation, 
the  cardinal  point  is  its  influence  on  the  community.  With- 
out a  correct  analysis  of  the  incidence  of  a  tax,  no  proper 
opinion  can  be  formed  as  to  its  actual  effect  or  its  justice.  It 
is,  therefore,  time  for  an  attempt  to  be  made  not  only  to  pass 
in  review  the  theories  hitherto  advanced,  but  to  contribute 
to  the  solution  of  some  of  the  theoretic  problems  while  pay- 
ing special  attention  to  the  practical  aspects  of  the  discussion. 

A  word  first  as  to  the  terminology.  In  the  process  of  tax- 
ing, we  must  distinguish  three  conceptions.  First,  a  tax  may 
be  imposed  on  some  person ;  secondly,  it  may  be  transferred 
by  him  to  a  second  person;  thirdly,  it  may  be  ultimately 
borne  by  this  second  person  or  transferred  to  others  by  whom 
it  is  finally  assumed.  Thus  the  person  who  originally  pays 
the  tax  may  not  be  the  one  who  bears  its  burden  in  last 
instance.  The  process  of  the  transfer  of  a  tax  is  known  as 
the  shifting  of  the  tax,  while  the  settlement  of  the  burden  on 
the  ultimate  taxpayer  is  called  the  incidence  of  the  tax.  The 
incidence  of  the  tax  is  therefore  the  result  of  the  shifting, 
and  the  real  economic  problem  lies  in  the  nature  of  the 
shiftings. 

The  English  language  is  unfortunately  deficient  in  its 
nomenclature.  While  incidence  conveys  to  the  mind  the 


2  Introduction 

notion  of  the  ultimate  result  of  the  shifting,  we  have  no 
word  to  express  the  immediate  result  of  the  original  imposi- 
tion of  the  tax.  "Assessment"  of  the  tax  looks  upon  the 
process  from  above  downward ;  but  we  lack  a  term  to  charac- 
terize the  process  as  seen  from  below  upward.  The  French 
and  the  Italians  have  the  words  percussion,  percussione,  to 
express  this  idea  of  the  primary  result  of  the  assessment. 
They,  therefore,  logically  term  the  shifting  of  the  tax  the 
repercussion 1  of  taxation,  the  ultimate  result  of  which  is  the 
incidence  (incidence,  incidenza).  But,  in  using  English,  we 
must  content  ourselves  with  the  awkward  term  "original 
incidence,"  while  "incidence,"  when  used  alone,  technically 
means  the  ultimate  incidence,  or  the  result  of  the  interme- 
diate process.  But  the  incidence  —  the  result  —  must  never 
be  confounded,  as  is  often  the  case,  with  the  shifting  —  the 
process. 

The  shifting  of  a  tax,  moreover,  must  not  be  confused  with 
what  is  known  as  the  evasion  of  a  tax  or  escape  from  a  tax. 
Shifting  is  the  non-payment  of  a  tax  through  a  transfer  of 
the  burden  to  some  one  else ;  evasion  is  the  non-payment  of 
a  tax  without  any  transfer.  A  tax  may  be  thrown  off  entirely 
without  being  shifted  to  any  one.  Evasion  may  be  either 
legitimate  or  illegitimate,  conscious  or  unconscious.  For  in- 
stance, through  smuggling  we  have  an  illegitimate  evasion, 
but  no  shifting  of  the  tax.  On  the  other  hand,  when  a  new 
tax  stimulates  the  improvement  of  processes  of  production,  — 
as,  for  example,  the  beet-sugar  tax  in  Europe  or  the  whiskey 
tax  in  America  at  one  time,  —  the  producer  evades  the  tax  to 
a  certain  extent,  but  does  not  shift  it.  This  is  legitimate  eva- 
sion. Finally,  when  there  is  capitalization  of  incidence,  —  a 
process  to  be  fully  explained  later,  whose  main  feature  is 
the  fact  that  under  certain  circumstances  the  purchaser  of  a 
taxable  object,  by  cutting  down  the  purchase  price,  discounts 
the  tax  which  he  will  have  to  pay,  —  there  is  practically  an 

1  They  also  use  the  words  translation,  traslazione,  which  are  the  same  as  our 
"transference"  or  shifting.  The  French  also  speak  of  taxes  being  "rejetes"  our 
"thrown  off"  or  "shifted." 


Introduction  3 

evasion  of  taxation,  but  no  shifting.  In  this  case  the  evasion 
is  unconscious;  in  both  the  preceding  cases  the  evasion  was 
the  result  of  a  conscious  effort.  The  distinction  between 
evasion  and  shifting  has  puzzled  many  writers.  We  shall 
have  occasion  to  revert  to  it  constantly. 

The  Germans  have  devised  a  very  elaborate  nomenclature 
to  distinguish  the  various  kinds  of  shifting ;  for  example,  to 
indicate  whether  a  tax  is  shifted  forward  from  the  producer 
to  the  consumer,  or  back  from  the  consumer  to  the  producer, 
or  farther  on  from  one  consumer  to  another.1  Such  nomen- 
clature is  impossible  in  English.  Moreover,  not  only  is  it  of 
little  importance,  but  scarcely  any  two  writers  use  the  terms  in 
precisely  the  same  way.  Above  all,  the  rather  fine  distinc- 
tions have  served  merely  to  bring  about  a  confusion  between 
evasion  and  shifting. 

Another  fertile  source  of  error  is  the  distinction  between 
the  shifting  of  a  tax  and  the  incidental  burden  which 
may  rest  on  the  shifter.  When  we  consider,  for  instance, 
the  shifting  of  a  tax  as  between  buyer  and  seller,  or  between 
producer  and  consumer,  the  question  that  concerns  us  is : 
Will  the  price  of  the  article  be  raised  by  the  imposition  of 
the  tax  ?  If  the  price  is  raised,  we  say  that  the  tax  is  to  that 
extent  shifted.  But  even  a  complete  shifting  of  the  tax  does 
not  necessarily  mean  an  entire  absence  of  loss  to  the  seller. 
Thus,  it  usually  happens  that  an  increase  of  the  price  of  a 
commodity  leads  to  a  decrease  in  sales ;  and  it  may  happen 
that  these  decreased  sales,  even  at  higher  prices,  may  yield 
less  total  profits  than  before.  In  such  a  case,  not  only  does 
the  buyer  pay  the  tax,  but  the  seller  also  suffers  a  loss,  even 
though  the  tax  has  been  shifted  completely.  The  study  of 
shifting,  it  is  evident,  concerns  itself  primarily  with  the 
extent  to  which  a  given  tax,  received  by  the  government,  is 
divided  between  the  parties  in  question.  It  does  not  seek  to 

1  The  German  terms  are  Abwdlzung,  Fortwalzung,  Riickiualzung,  Weiterwal- 
zung,  and  the  general  term  Ueber-walzung.  Their  Abw'dlzung is  nothing  but  our 
"evasion,"  and  is  not  a  form  of  shifting  at  all.  Some  writers,  however, —  Roscher, 
for  example,  —  use  "  Abwalzung  "  to  denote  shifting  in  general.  There  is  no 
uniformity  in  the  usage. 


4  Introduction 

exhaust  the  problem  of  the  incidental  or  additional  burdens 
which  may  result  from  the  tax. 

Finally,  we  must  not  confound  the  incidence  with  the 
effect  of  taxation.  A  tax  may  have  a  great  many  effects. 
It  may  diminish  industry  and  impoverish  individuals ;  it  may 
stimulate  production  and  enrich  individuals;  it  may  be  an 
unmitigated  curse  to  society ;  it  may  be  a  necessary  evil ;  it 
may  be  an  unqualified  boon  to  the  community  regarded  as 
a  whole.  With  none  of  these  problems  does  the  student  of 
incidence  busy  himself.  All  that  he  has  to  investigate  is  the 
question :  On  whom  does  the  tax  ultimately  fall  ?  When  we 
once  know  this,  we  can  then  proceed  to  the  further  discussion 
of  the  effects  produced  by  the  pressure  of  taxation  on  the 
various  classes  or  individuals.  The  shifting  is  the  process ; 
the  incidence  is  the  result;  the  changes  in  the  distribution  of 
wealth  are  the  effect. 

The  discussion  of  incidence  thus  depends  entirely  on  the 
investigation  of  the  shifting  of  taxation.  The  real  problem 
before  us  is  to  ascertain  the  conditions  according  to  which  a 
tax  is  shifted  onward,  backward,  or  not  at  all.  Only  when 
we  understand  whither,  why,  and  how  a  tax  is  shifted,  can  we 
discover  its  actual  incidence.  In  the  following  pages  an 
attempt  will  be  made  to  attack  the  problem  by  first  giving  a 
detailed  critical  history  of  the  doctrine,  and  then  taking  up 
the  positive  theory  itself.  In  the  second  part  it  will  be  con- 
venient to  begin  with  a  statement  of  some  general  principles, 
to  follow  this  with  a  consideration  of  the  chief  separate  taxes, 
one  by  one,  and  to  close  by  drawing  the  general  conclusions 
applicable  to  the  science  of  public  finance. 


PART   I 

THE    HISTORY   OF    THE    DOCTRINE    OF 
INCIDENCE 


GENERAL  SURVEY 

THE  writers  on  the  shifting  and  incidence  of  taxation,1  like 
those  on  almost  all  other  economic  topics,  may  be  broadly 
divided  into  two  classes,  marked  off  from  each  other  by  the 
period  in  which  the  theory  of  distribution  was  formulated  by 
the  Physiocrats  and  Adam  Smith.  The  doctrine  enunciated 
by  the  first  class  of  writers  —  almost  exclusively  English  — 
may  be  summed  up  under  the  head  of  "  The  Early  Theories." 

The  English  literature  on  taxation,  prior  to  Adam  Smith, 
begins  at  about  the  middle  of  the  seventeenth  century.  For 
somewhat  more  than  a  hundred  years,  the  theories  on  the 
incidence  of  taxation  are  found,  with  a  few  important  excep- 
tions, in  occasional  pamphlets  written  to  advocate  or  to 
oppose  practical  measures  of  reform.  It  was  not  until  a  few 
decades  before  Adam  Smith  that  a  consideration  of  the  gen- 
eral theory  of  incidence  assumed  a  more  prominent  place 
in  the  treatises  on  economic  topics.  The  propositions  of  the 
statesmen  as  well  as  of  the  pamphleteers  of  the  earlier  period 
rest,  however,  on  more  or  less  definite  theories  of  incidence. 

1  The  only  works  which  contain  a  history  of  the  theory  of  incidence  are  the 
German  works  of  J.  Kaizl,  Die  Lehre  von  der  Ueberwalzung  der  Steuern,  1882, 
and  G.  v.  Falck,  Kritische  RUckblicke  auf  die  Entwickelung  der  Lehre  von  der 
Steueriiberwahung  seit  Adam  Smithy  1882.  Both  these  works  deal  only  with  the 
modern  theories,  and  even  for  this  period  they  are  inadequate.  Whole  classes  of 
authors  are  omitted,  among  them  some  important  ones.  Each  work  is  chrono- 
logical, and  makes  little  attempt  to  analyze  the  theories  according  to  schools. 
Falck  is  richer  in  the  account  of  the  early  German  writers.  Kaizl  is  better  ac- 
quainted with  several  of  the  French  authors,  although  he  omits  some  of  the  most 
noteworthy.  Both  neglect  the  English  authors,  with  the  exception  of  Smith, 
Ricardo  and  Mill,  and  ignore  the  Continental  and  American  writers.  Falck  is 
almost  without  any  positive  ideas  at  all,  while  Kaizl  adheres  so  closely  to  one 
or  two  German  predecessors  that  his  own  constructive  work  is  slight.  Both 
books  are,  however,  to  be  recommended  as  the  only  ones  that  we  possess  on  the 
subject.  The  abler  work,  originally  written  as  a  doctor's  dissertation,  is  that  of  Dr. 
Kaizl,  who  has  since  then  attained  a  prominent  position  as  professor  in  the  Uni- 
versity of  Prague,  and  as  author  of  numerous  economic  treatises  in  Bohemian,  and 
who  now  (1898)  occupies  the  post  of  Minister  of  Finance  in  the  Austro-Hungarian 
monarchy. 

7 


8  General  Survey 

It  may  conduce  to  clearness  to  classify  these  pioneers  accord- 
ing to  their  practical  inferences  from  the  doctrine  of  inci- 
dence. From  this  point  of  view,  the  writers  before  Adam 
Smith  may  be  divided  into  six  categories,  as  follows :  — 

1.  Those  who  discuss  the  general  excise. 

2.  Those  who  favor  a  single  tax  on  luxuries.1 

3.  Those  who  favor  a  single  tax  on  houses. 

4.  Those  who  favor  a  general  property  tax. 

5.  Those  who  favor  a  single  tax  on  land. 

6.  Those  who  favor  a  more  eclectic  system. 

This  whole  field  of  economic  inquiry  has  thus  far  been  so 
little  cultivated,  and  many  of  the  works  referred  to  are  now 
so  rare  that  it  may  be  wise  to  treat  this  section  of  the  history 
more  fully  than  would  otherwise  be  permissible  in  a  work 
which  pretends  to  give  only  a  general  sketch  of  the  historical 
development  of  the  doctrine  of  incidence. 

The  views  developed  in  the  period  subsequent  to  the 
Physiocrats  and  Adam  Smith,  which  will  be  discussed  in 
Book  II.  under  the  title  of  "  The  Modern  Doctrines,"  are 
somewhat  more  difficult  to  subdivide  with  accuracy;  for  it 
is  not  always  easy  to  draw  the  line  sharply  between  writers 
many  of  whom  have  much  in  common.  Nevertheless,  their 
theories  of  the  incidence  of  taxation  may  be  conveniently 
classified  as  follows :  — 

1.  The  Physiocratic  theory. 

2.  The  Absolute  theory. 

3.  The  Diffusion  theory. 

(a)  The  Optimistic  theory. 

(b)  The  Pessimistic  theory. 

4.  The  Capitalization  theory. 

5.  The  Eclectic  theory. 

6.  The  Agnostic  theory. 

7.  The  Socialistic  theory. 

8.  The  Quantitative  or  Mathematical  theory. 

1  The  word  "single"  is  not  here  used  in  opposition  to  "double."  The  phrase 
denotes  a  general  tax  on  luxuries  as  the  exclusive  tax. 


BOOK   I 

THE  EARLY  THEORIES 


rn*z 

t  UNIVERSITY 

V 


- 


CHAPTER  I 
THOSE  WHO  DISCUSS  THE  GENERAL  EXCISE 

BY  the  term  "excise"  is  meant  a  tax  on  commodities, 
levied  on  the  producer  or  the  domestic  dealer.  It  is  distinct 
from  customs  duties  which  are  levied  on  the  importer ; 
although,  after  commodities  have  once  been  imported,  an 
internal  duty  or  excise  may  also  be  levied  on  them.  These 
internal  taxes  or  excises  are  popularly  supposed  to  be  shifted 
to  the  consumer  and,  accordingly,  while  they  are  imposed  in 
first  instance  on  the  producer  or  dealer  they  are  commonly 
classed  as  indirect  taxes  on  consumption.  The  English 
publicists,  however,  were  by  no  means  unanimous  in  accept- 
ing this  popular  view.  We  may,  in  fact,  distinguish  no  less 
than  four  different  theories  as  to  the  incidence  of  the  excise. 
These  theories  are :  — 

1.  That,  while  the  excise  is  at  first  shifted  from  the  dealers 

to  the  consumers,  it  will  not  finally  rest  on  the  poor 
consumers. 

2.  That  the  excise  will  rest  on  consumers  in  general. 

3.  That  the  excise  will  be  shifted  to  the  landowners. 

4.  That  the  excise  will  finally  rest  on  the  dealers  or  traders. 

The  earliest  writers  to  propose  a  system  of  excises  did  not 
look  much  farther  than  the  surface  fact  that  the  excise  was 
a  tax  on  a  consumable  commodity,  and  therefore  presumably 
a  tax  on  consumption.  Their  ideal  was  a  tax  on  expenditure, 
and  this  ideal,  in  their  opinion,  could  be  most  easily  attained 
by  a  general  excise.  Although  this  project  was  a  favorite 
one  with  many  of  the  early  authors,  it  gradually  met  with 
opponents  as  well  as  with  adherents  until,  under  Walpole,  it 

ii 


12  Shifting  and  Incidence  of  Taxation 

became,  in  the  second  quarter   of   the   eighteenth  century, 
the  subject  of  a  fierce  controversy.1 

The  first  English  writer  to  posit  expenditure  as  the  basis 
of  taxation  was  Hobbes,  in  a  work  written  shortly  after  the 
imposition  of  the  first  excise  in  1643.  Hobbes,  like  many 
of  the  later  continental  tax  reformers,  held  a  tax  on  expense 
to  be  a  logical  corollary  of  the  doctrines  of  equality  and 
universality  of  taxation.  To  tax  property,  he  thought,  would 
be  to  discourage  thrift  and  to  put  a  premium  on  extrava- 
gance ;  while,  since  everybody  consumes  something,  a  tax  on 
expense  cannot  possibly  be  evaded  like  so  many  of  the  other 
taxes.2  The  scheme  of  the  excise  itself  was  soon  adopted  by 
several  writers.  Thus  Cradock  states  that  "the  Generall 
Excise  (so  much  decryed  and  Petitioned  against)  in  its 
proper  Constitution,  is  the  most  equitable  of  Impossitions : 
no  man  being  charged  with  it,  but  he  that  sels  it  for  profit, 
to  the  consumption  of  the  Commodity,  who  in  truth  pays  it 

1  Those  who  care  to  go  into  the  literary  history  of  the  controversy  over  the 
famous  "  excise-scheme,"  which  was  in  reality  no  scheme  for  a  general  excise  at 
all,  are  referred  to  the  monographs  of  Leser,   Ein  Accisestreit  in   England, 
Heidelberg,  1875,  anc*  °f  Ricca-Salerno,  Le  dottrine  finanziarie  in  Inghilterra 
tra  la  fine  del  secolo  XVII  e  la  prima  meta  del  XVIII,  Bologna,  1888.     A  list 
of  additional  contemporary  pamphlets  may  be  found  in  the  bibliography  printed 
by  Sinclair,  History  of  the  Public  Revenue  of  the  British  Empire,  3d  ed.,  1804, 
vol.  iii,  appendix,  pp.  94-136.      Many  of  the  monographs  discussed  by  Leser 
and  Ricca-Salerno  do  not  dwell  on  the  question  of  incidence.     So  far  as  they  do 
discuss  the  subject,  they,  as  well  as  other  works  of  the  same  period  not  mentioned 
by  the  German  and  Italian  writers,  will  be  considered  in  the  following  pages. 

2  "  The  Equality  of  Imposition  consisteth  rather  in  the  Equality  of  that  which 
is  consumed,  than  of  the  riches  of  the  persons  that  consume  the  same.     For  what 
reason  is  there,  that  he  which  laboureth  much,  and  sparing  the  fruits  of  his  labour, 
consumeth  little,  should  be  more  charged,  then  he  that  living  idlely,  getteth  little, 
and  spendeth  all  he  gets;  seeing  the  one  hath  no  more  protection  from  the 
Common-wealth  then  the  other  ?    But  when  the  Impositions  are  layd  upon  those 
things  which  men  consume,  every  man  payeth  Equally  for  what  he  useth  :  Nor  is 
the  Common-wealth  defrauded,  by  the  luxurious  waste  of  private  men." — Levia- 
than, or  the  Matter,  Forme,  and  Power  of  a   Common-wealth  Ecclesiasticall  and 
Civill.    By  Thomas  Hobbes  of  Malmesbury,   London,  1651,  chap.  30,  part  2, 
p.  181  (reprint  of  1881,  p.  270).     For  a  fuller  statement  of  the  benefit  theory  of 
taxation  on  which  this  passage  is  based,  see  Seligman,  Progressive  Taxation  in 

Theory  and  Practice,  1894,  pp.  87,  88. 


Those  who  discuss  the  General  Excise     -     13 

insensibly  without  Complaint." *  Another  writer  in  speaking 
of  the  Dutch  excise  regards  it  as  "  certainly  the  most  equal 
and  indifferent  tax  in  the  world,  and  least  prejudicial  to  any 
people."2  So  familiar  indeed  did  the  system  become  that 
Culpeper  was  able  to  state :  "  It  hath  alwayes  been  a  received 
Maxim,  That  our  meer  Consumption  can  scarce  be  too  heavily 
excised."  3  And  in  another  passage  he  remarks  that :  "  Do- 
mestick  Excise  in  a  thriving  State  hath  no  fellow,  it  carries 
no  Compost  from  the  Soyl,  and  even  the  Labourer  pays  it 
cheerfully  when  work  is  quick."  4 

The  excise,  however,  did  not  exist  long  before  the  pam- 
phleteers began  to  have  more  decided  views  as  to  its  inci- 
dence. Thus  began  the  differences  of  opinion,  which  we 
shall  now  proceed  to  explain. 

I.  The  Excise  does  not  rest  on  the  Poor  Consumers 

The  first  economist  to  express  any  decided  opinion  on  the 
incidence  of  the  excise  was  the  famous  advocate  of  the  Mer- 
cantilist theories,  Thomas  Mun.  He  discusses  the  tax  systems 

1  An  Expedient  for  Regulating  the  Customes  and  Excise.     Approved  by  divers 
•well  affected  Marchants,  and  others  of  the  Citty  of  London.     By  Francis  Cradock. 
Marchant.     London,  1659,  p.  I. 

2  England"* 's  Interest  Asserted  in  the  Improvement  of  its  Native  Commodities  ; 
and  more  especially  the  Manufacture  of  Wool.    By  a  true  Lover  of  his  Majesty 
and  Native  Country.     London,  1669,  p.  33. 

3  A  Discourse  shewing  the  many  Advantages  -which  will  accrue  to  this  Kingdom 
by  the  abatement  of  USUR  Y,  together  -with  the  Absolute  necessity  of  Reducing  Interest 
of  MONE  Y  to  the  lowest  rate  it  bears  in  other  Countreys,  That,  at  least,  we  may 
Trade  with  our  Neighbours  upon  Equal  Termes.     Humbly  presented  to  the  High 
Court  of  Parliament  now  Sitting.    By  Sir  Tho.  Culpeper,  jun.  Kt.    London,  1668, 
p.  3.     The  title  of  the  work  explains  why  Culpeper  follows  up  the  passage  in  the 
text  by  the  admonition :  "  Then  tax  Usury,  there  is  no  Consumption  like  it;   Excise 
the  Excise-man,  for  Usury  is  the  grand  Excise  upon  our  Land  and  Trade." 

4  Ibid.,  p.  2.    Culpeper  is  opposed  to  any  further  taxation  of  land,  and  expresses 
himself  vigorously  as  follows :  — 

"  Can  the  Land  bear  it?  Surely  No,  if  it  be  not  limited  to  the  present  distress, 
and  sweetened  with  some  Recompense :  Alas !  Land  is  at  its  last  Gasp,  and 
ready  to  give  up  the  Ghost,  without  a  powerful  Cordial :  Most  Parishes  can 
already  present  some  Farms  wholly  deserted,  Neither  Tenant  being  willing  to  hire, 
nor  Owner  able  to  stock  them;  Many  stocked  but  two  halfs,  most  to  loss :  Be- 


14  Shifting  and  Incidence  of  Taxation 

of  Italy  and  Holland,  and  finds  their  essence  to  consist  in 
"  a  custom  on  all  new  wares  transported,  customs  upon  every 
alienation  or  sale  of  live  Cattel,  Lands,  Houses,  and  the  por- 
tions or  marriage  mony  of  women,  license  mony  upon  all 
Victualling  houses  and  Innkeepers,  head  money,  Custom  upon 
all  the  Corn,  Wine,  Oyl,  Salt  and  the  like,  which  grow  and 
are  consumed  in  their  own  dominions."  Now  all  these  seem 
to  be  "  a  rabble  of  oppression  to  make  the  people  poor  and 
miserable."  *  But  Mun  declares  this  to  be  a  mistake.  For  in 
proportion  as  the  necessaries  of  life  increase  in  price,  the  rate 
of  wages  must  rise  also.  In  the  long  run,  therefore,  the  taxes 
on  the  poor  will  be  shifted  to  the  employers,  and  through 
them  to  the  rich  consumers  of  manufactured  articles.2  This 
is  a  good  thing,  because  the  rich  will  thus  be  "  forced  to  abate 
their  sinful  excess  and  idle  retainers."3  Mun's  idea,  it  is 
plain,  is  that  taxes  on  consumption  are  to  be  commended 
because  they  will  be  shifted  to  the  employing  producer ;  or, 
at  all  events,  that  they  must  not  be  regarded  as  falling  on  the 
consumption  of  the  mass  of  the  community. 

Other  writers  furthered  the  doctrine  that  the  excise  did 
not  rest  on  the  mass  of  consumers  by  advocating  the  wider 
theory  that  taxes  in  general  are  really  no  burden.  Thus, 
Waterhouse  maintained  that  "  money  raised  upon  the  poorer 
sort,  returns  to  them  again  "  in  the  shape  of  increased  em- 
sides,  Land  is  like  the  heart,  from  which  all  the  other  Members  must  receive  their 
Life  and  Vigour;  Great  reason  therefore  have  we  to  cherish  our  Land,  unless  we 
will  reduce  our  selves  to  the  state  of  a  meer  Colony;  which  would  manifestly  end 
in  our  Desolation  and  Conquest." 

1  England* s  Treasure  by  Forraign  Trade,  or,  the  Ballance  of  our  Forraign 
Trade  is  the  Rule  of  our  Treasure.     By  Thomas  Mun.    1664,  chap.  xvi. :  "  How 
the  revenues  and  incomes  of  princes  may  justly  be  raised,"  pp.  151,  152. 

2  "Neither  are  these  heavy  Contributions  so  hurtfull  to  the  happiness  of  the 
people,  as  they  are  commonly  esteemed :  for  as  the  food  and  rayment  of  the  poor 
is  made  dear  by  Excise,  so  doth  the  price  of  their  labour  rise  in  proportion; 
whereby  the  burden  (if  any  be)  is  still  upon  the  rich,  who  are  either  idle,  or  at 
least  work  not  in  this  kind,  yet  have  they  the  use  and  are  the  great  consumers  of 
the  poors  labour."  —  Ibid.,  p.  154  (p.  89  of  the  reprint  of  1895  in  Ashley's  Series 
of  Economic  Classics}. 

»  Ibid.,  p.  155. 


Those  who  discuss  the  General  Excise          15 

ployment  or  higher  wages,  and  that  a  tax  must  be  looked 
upon  as  a  loan,  the  proceeds  of  which  soon  come  back  to  the 
taxpayers.1  Another  writer  laid  down  the  proposition  that 
"  Impositions  upon  a  People  make  them  thrive," 2  and  that 
"Taxes  are  no  Charge  either  to  the  Kingdom  in  general,  or  to 
particular  Persons;  but  on  the  contrary  a  Gain  to  all."3  His 
chief  arguments  to  prove  this  assertion  are,  first,  that  since 
taxes  are  employed  on  court  or  for  war  they  make  money 
circulate,  and,  secondly,  that  "the  poor  are  employed  by 
Taxes,  and  are  by  that  means  taken  off  from  being  a  Charge 
to  the  Kingdom."4  The  author  goes  even  farther  than 
Waterhouse;  for  while  the  'latter  contented  himself  with 
calling  taxes  a  species  of  loan,  the  former  maintains  that  they 
ought  properly  to  be  regarded  as  the  poor  man's  bank,  which 
supports  him  in  distress.5  Of  all  taxes,  none  appears  to  him 
so  good  as  the  excise,  "  which  indeed  seems  of  all  Taxes  the 
most  equal :  for  that  no  man  by  it  can  be  said  to  be  oppressed, 

1  "  What  money  the  people  bestow  upon  his  Majesty  in  Leavies  and  assess- 
ments, his  Majesty  returns  to  his  people  in  wages,  pay,  exchange  and  Merchan- 
dize, what  he  receives  for  his  care,  he  payeth  them  for  their  Labour;  what  is  paid 
to  his  Exchequer  is  returned  to  their  Markets :  there  is  a  circle  in  the  veine  of  Gold 
and  Silver  as  in  that  of  blood.  .  .  .    This  money  is  not  lost,  but  lent.  .  .  .    What 
the  Gentry  take  from  you  with  one  hand,  they  give  you  with  another;  what  their 
power  ruling  over  you  calls  for  in  contribution,  their  goodness  in  employing  you 
bestows  upon  you  in  wages."  —  One  Tale  is  good,  until  another  is  told,  or,  Some 
sober  Reflections  upon  the  Act  for  Chimney -Money.    Drawn  up  for  the  Use  of 
some  Neighbors,  and  thought  usefull  to  be  communicated  to  the  good  people  of  this 
NATION.    By  William  Waterhouse,  Esq.,  London,  1662,  pp.  29,  30. 

2  Taxes  no  Charge :  in  a  Letter  from  a  Gentleman,  to  a  Person  of  Quality e 
Shewing  the  Nature,  Use,  and  Benefit  of  Taxes  in  this  Kingdom  ;  and  compared 
with  the  Impositions  of  Foreign  States.     London,  1690,  p.  5. 

8  Ibid.,  p.  9. 

*  Ibid.,  p.  13.  Additional  reasons  are  that  "the  worst  members  in  the  Com- 
monwealth (viz.)  the  Extravagant  and  Debauch'd"  really  pay  the  taxes,  and 
that  so  far  as  taxes  consist  of  customs  duties,  they  "Keep  out  a  Destructive 
Trade." 

6  "  'Tis  a  vulgar  error  to  believe  that  Taxes,  even  to  the  meanest  Man  is  a 
Charge,  for  that  his  Mite  is  with  increase  return'd  by  the  expence  of  that  which 
would  never  have  seen  day,  but  by  the  force  of  a  Law;  so  that  publick  Taxes,  ex- 
pended in  our  own  Country,  may  be  accounted  the  poor  and  the  Mechanick's  bank, 
by  which  they  are  employed,  and  maintained."  —  Ibid.,  pp.  17,  18. 


1 6  Shifting  and  Incidence  of  Taxation 

he  being  his  own  Assessor,  and  pays  but  what  he  pleases, 
according  to  his  Expence."  l 

Another  anonymous  pamphleteer  of  the  same  period  agrees 
that  "  Excises  are  the  most  equal  and  less  grievous  Tax  of 
all  others,"  and  believes  that  a  moderate  tax  will  not  be  felt 
to  such  an  extent  as  to  hinder  consumption  at  all.2  "  Who 
would  ever  use  the  less  Sugar,  if  one  peny  Excise  were  paid 
out  of  twelve  peniworth  ?  Who  would  use  the  fewer  Ribbons, 
for  2d.  Excise  upon  every  I2d.  ?  Who  would  play  the  less 
at  Cards  or  Dice,  if  3d.  were  paid  out  of  I2d.  ?  What  Lady 
.would  ever  forbear  to  wear  Pearls  or  Diamonds,  or  to  buy 
Fans  and  Looking-Glasses,  if  4d.  were  laid  upon  every  I2d.  ? " 
Our  author's  confidence  in  the  harmlessness  of  a  tax  amount- 
ing to  one-third  of  the  value  of  a  commodity  would,  perhaps, 
not  be  shared  by  many  of  the  present  day. 

These  views  of  Mun  and  his  successors  as  to  the  virtual 
immunity  of  the  mass  of  consumers  from  the  weight  of  taxa- 
tion did  not,  however,  make  much  headway.  During  the 
following  decades  the  opinion,  to  be  discussed  in  the  next 
section,  that  the  excise  was  a  real  burden  on  the  poorer  con- 
sumers, gradually  gained  ground.  But  toward  the  middle  of 
the  eighteenth  century,  isolated  writers  reverted  to  the  theory 
of  Mun.  Of  these,  none  is  more  remarkable  than  Fauquier. 
He  gives  a  most  lucid  and  vigorous  argument,  designed  to 
show  that  a  tax  on  the  workingman,  whether  a  direct  tax  on 
wages  or  an  excise  on  the  necessaries  of  life,  will  inevitably 
be  shifted  from  his  shoulders.  Fauquier  puts  his  general 
principle  as  follows :  "  The  Poor  do  not,  never  have,  nor  ever 
possibly  can,  pay  any  Tax  whatever.  A  man  that  has  noth- 

1  Taxes  no  Charge,  p.  25.     Although  the  author  opposes  the  benevolences, 
monopolies,  alterations  of  money  and  taxes  on  polls,  offices  and  travellers,  he  sug- 
gests a  supplement  to  the  general  excise  through  taxes  on  Jews,  playhouses  and 
"  the  Vermin  of  the  Nation,  lewd  Persons  of  both  Sexes."     It  is  no  wonder  that 
he  confesses  in  another  place :    "  thus  I  have  huddl'd  together  a  mixt  Discourse." 
—  Ibid.,  p.  19. 

2  A  familiar  Discourse  between   George,  a  true-hearted  English  Gentleman, 
and  Hans,  a  Dutch  Merchant :    Concerning  the  present  Affairs  of  England. 
London,  1672,  pp.  37,  38. 


Those  who  discuss  the  General  Excise          17 

ing  can  pay  nothing."1  He  proceeds  on  the  assumption 
that  wages  are  always  at  the  bare  minimum  of  subsistence. 
If  the  laborer,  therefore,  can  no  longer  live  on  his  usual  in- 
come, whether  this  condition  be  due  to  an  increase  in  the 
price  of  necessaries  or  to  a  forcible  diminution  of  his  wages 
through  a  tax,  his  nominal  wages  must  rise  in  proportion.2 
In  fact,  Fauquier  believes  that  in  many  cases  his  wages  will 
rise  more  than  in  proportion  to  the  tax.  But  this  he  does  not 
attempt  to  prove.  He  does,  indeed,  try  to  show  that  when  a 
tax  is  imposed  on  the  producer  or  the  seller  of  commodities, 
a  sum  over  and  above  the  tax  will  be  shifted  to  the  pur- 
chaser.3 But  even  if  this  conclusion  were  valid  as  to  profits, 
the  reasoning  would  not  be  applicable  to  wages.  However 
this  may  be,  Fauquier  is  quite  positive  that  taxes  rest  only  on 
the  rich  consumer,  "that  is,  the  Man  of  Fortune  who  lives  on 
his  Income."  And  this  is  true,  "even  in  those  Taxes  which 
are  said  mostly  to  affect  the  Poor,  and  which  they  seem,  at 
first  Sight,  to  pay  out  of  their  own  Pockets."  4 

Fauquier,  indeed,  differed  from  Mun  in  his  practical  con- 
clusions. For  while  Mun  advocated  the  general  excise,  Fau- 
quier opposed  it  on  the  ground  that  the  same  result  —  that 

1  An  Essay  on   Ways  and  Means  for  raising  Money  for  the  Support  of  the 
Present  War,  without  increasing  the  Public  Debts.     By  F.  F.  (Fauquier),  Lon- 
don, 1756,  p.  17.     "This  is  universally  true  in  all  Countries,"  he  adds,  "at  all 
Times,  and  equally  so,  whether  Provisions  are  dear  or  cheap.     I  have  heard,  that 
in  India  a  man  can  live  for  one  Penny  a  Day;    this  then  will  be  nearly  the  Price 
of  Labour  in  that  Country." 

2  "  If  by  Taxes,  or  Dearth,  or  any  other  Cause,  the  common  Necessaries  of  Life 
become  so  dear,  that  a  Labourer  cannot  live  at  the  usual  Wages;  the  Price  of 
Labour  must,  and  in  Fact  actually  does,  rise  in  Proportion  thereto  at  least,  gen- 
erally much  more."  —  Ibid.,  p.  18.     "If  Taxes  are  laid  on  Labour  meerly,  or  on 
such  Articles  as  the  meanest  Labourer  must  want  and  use,  he  will  still  live,  and 
his  Wages  must  be  raised."  —  Ibid.,  p.  20. 

3  "  If  [taxes  are  laid]  on  the  Manufacturers,  or  Venders  of  Goods,  they  will 
raise  the  Prices  of  the  Commodities  they  respectively  deal  in,  sufficient  not  only  to 
pay  the  Tax,  but  to  make  them  full  amends  for  the  Money  they  disburse  for  the 
Payment  of  it,  and  then  always  make  a  third  Addition  to  bring  the  Price  to  a 
round  or  even  Sum.     So  that  the  whole  Tax,  and  much  more,  is  ultimately  paid 
by  the  Consumer."  —  Ibid.,  pp.  19,  20. 

*  Ibid.,  p.  20. 
c 


1 8  Shifting  and  Incidence  of  Taxation 

of  taxing  expense  —  might  be  more  conveniently  attained  in 
another  way.1  The  point  of  interest  to  us  here,  however,  is 
that  both  writers  agreed  in  the  belief  that  an  excise  would 
not  rest  on  the  poor  consumer,  but  would  be  shifted  to  the 
employer,  and  that  if  we  can  speak  of  an  excise  resting  at  all 
on  the  consumer,  it  is  the  rich  consumer  that  is  meant.  This 
doctrine  was  later  accepted  by  Sir  James  Steuart 2  and  be- 
came a  part  of  the  classical  doctrine,  as  elaborated  by  Adam 
Smith  and  Ricardo. 

2.    The  Excise  rests  on  Consumers  in  General 

By  far  a  majority  of  the  writers  believed  that  the  excise 
rested  on  the  mass  of  consumers  in  general,  irrespective  of 
the  fact  whether  they  were  poor  or  rich.  This  broad 
theory  was  ushered  in  by  the  famous  economist  and  statisti- 
cian, Sir  William  Petty.  Petty  also  has  the  distinction  of 
being  the  first  English  writer  to  devote  an  entire  work  to  the 
subject  of  taxation.3  It  will  repay  us,  therefore,  to  dwell 
somewhat  more  fully  on  the  general  theory  of  incidence  that 
is  found  in  his  book. 

Petty  first  discusses  the  procuring  of  revenue  from  land, 
which  he  says  can  be  done  in  two  ways,  —  either  by  "  setting 
apart  a  proportion  of  the  whole  Territory  for  Publick  Uses," 
or  by  "  an  excision  of  the  land  by  way  of  assessment  or  land 
taxe."  Such  a  land  tax,  where  "an  aliquot  part  of  every 
Landlords  Rent  were  excinded  or  retrenched,"  is  good  in  a 
new  country,  where  a  certain  quit-rent  is  reserved  beforehand, 
because  it  will  be  borne  partly  by  the  landlord,  but  also  partly 
by  the  consumers.  For  "it  is  not  onely  the  Landlord  pays, 
but  every  man  who  eats  but  an  Egg,  or  an  Onion  of  the 
growth  of  his  Lands ;  or  who  uses  the  help  of  any  Artisan, 
which  feedeth  on  the  same."4  In  old  countries,  like  Eng- 
land, he  continues,  where  rents  are  fixed  for  a  long  time,  such 

1  See  below,  p.  62. 

2  See  below,  p.  88. 

8  A  Treatise  of  Taxes  and  Contributions.  [By  William  Petty.]    London,  1667. 
4  Ibid.,  p.  20. 


Those  who  discuss  the  General  Excise          19 

a  tax  would  be  unjust,  because  it  would  benefit  only  the  land- 
lords who  renew  their  rents.  These  gain  doubly,  "  one  way 
by  the  raising  of  their  Revenues,  and  the  other  by  enhansing 
the  prices  of  provisions  upon  them."  For  the  tax  "  doth  ulti- 
mately light  upon  the  consumptioners,"  or,  as  he  again  puts 
it,  a  "  Land-taxe  resolves  into  an  irregular  Excize  upon  Con- 
sumptions, that  those  bear  it  most,  who  least  complain." 1 

Petty  also  discusses  the  house  tax  or  "an  Excisium  out  of 
the  Rent  of  Houseing."  He  deems  the  influence  of  this  much 
more  uncertain  than  that  of  land,  "for  an  House  is  of  a  double 
nature,  viz. :  one,  wherein  it  is  a  way  and  means  of  expence ; 
the  other,  as  'tis  an  Instrument  and  Tool  of  gain.  .  .  .  Now 
the  way  of  a  Land-taxe  rates  housing,  as  of  the  latter  nature, 
but  the  Excise  as  of  the  former."2  From  which  it  may  be 
inferred  that  Petty  thinks  a  house  tax  will  be  shifted  to  the 
consumer  or  occupier,  and  will  be  shifted  further  on  to  con- 
sumers when  the  occupier  himself  is  a  producer. 

In  regard  to  "  customs,"  both  "  outwards  "  and  "  inwards," 
Petty  assumes  that  they  will  be  shifted  to  the  consumers,  and 
concerns  himself  primarily  with  stating  the  principles  on 
which  they  should  be  levied.  His  chief  objection  to  customs 
duties  is  that  they  are  frequently  imposed  on  articles  which 
serve  as  the  raw  materials  for  further  production,  or,  as  he 
puts  it,  "  that  Duties  are  laid  upon  things  not  yet  ripe  for  use, 
upon  Commodities  in  fieri,  and  but  in  the  way  of  their  full 
improvements."  3  Poll-money,  which  he  opposes  because  of 
its  inequality,4  he  thinks  cannot  be  shifted.  He  concludes 
that  a  general  excise  is  the  best  of  all  taxes,  and  assumes 
that,  while  it  will  be  transferred  to  the  general  consumer,  it 
cannot  be  shifted  any  further.  In  this  respect  it  is  superior 

1  A  Treatise  of  Taxes  and  Contributions,  p.  21. 

2  Ibid.,  p.  21. 

8  Ibid.,  p.  36.  "  This,"  he  later  adds,  "  is  the  reason  why  I  think  the  Leavy 
we  commonly  call  Customs  to  be  unseasonable  and  preposterous,  the  same  being 
a  payment  before  consumption."  —  Ibid.,  p.  70. 

4  Petty  grows  very  indignant  over  the  English  system :  "  so  as  by  this  Confu- 
sion, Arbitraries,  Irregularities,  and  hotch  pot  of  Qualifications,  no  estimate  could 
be  made  of  the  fitness  of  this  Plaister  to  the  Sore."  —  Ibid.,  p.  41. 


2O  Shifting  and  Incidence  of  Taxation 

to  the  land  and  house  taxes ;  for  these,  as  we  have  seen,  are 
only  partially  shifted  to  the  consumer. 

Petty's  views  on  the  general  property  tax  are  interesting  as 
showing  in  this,  the  first  book  on  the  theory  of  taxation,  a 
recognition  of  the  defects  of  the  system  which  was  gradually 
coming  to  its  close  in  England.  After  recounting  the  many 
defects  and  abuses  connected  with  the  system,1  he  closes 
with  the  statement :  "  I  have  not  patience  to  speak  more 
against  it :  daring  rather  conclude  without  more  ado,  in  the 
words  of  our  Comick  to  be  naught,  yea  exceeding  naught, 
very  abominable,  and  not  good."  In  another  work,  how- 
ever, Petty  seems  still  to  pin  some  faith  on  the  chance  of 
reaching  personal  property.2 

This  is  not  the  place  to  discuss  Petty's  many  reasons  for 
favoring  expenditure  as  the  basis  of  taxation.3  It  will  suffice 
for  our  purposes  to  state  that,  starting  out  from  the  principle 
that  a  tax  on  expense  is  the  ideal  form  of  taxation,  Petty  ad- 
vocates the  general  excise  as  reaching  this  result  most  surely 
and  most  speedily.  He  discusses  the  plan  of  levying  a 
single  tax  on  some  one  object  of  expenditure,  termed  by  him 
the  "Accumulative  Excise"  or  tax  "upon  some  one  single 
particular,"  which  may  be  deemed  "  to  be  nearest  the  com- 
mon standard  of  all  Expense."  But  he  prefers  the  scheme 
of  levying  a  tax  upon  "  every  particular  Necessary,  just  when 
it  is  ripe  for  Consumption."4  Still,  as  he  himself  sees  that 

1  "  There  have  been  in  our  times,  ways  of  levying  an  aliquot  part  of  mens  Es- 
tates, as  a  Fifth,  and  Twentieth,  viz.  of  their  Estates  real  and  personal,  yea,  of  their 
Offices,  Faculties,  and  imaginary  Estates  also,  in  and  about  which  way  may  be  so 
much  fraud,  collusion,  oppression,  and  trouble,  some  purposely  getting  themselves 
taxed  to  gain  more  trust :  Others  bribing  to  be  taxed  low,  and  it  being  impossible 
to  check  or  examine,  or  trace  these  Collections  by  the  print  of  any  footsteps  they 
leave  (such  as  the  Hearths  of  Chimney  are)." — A  Treatise  of  Taxes,  pp.  61,  62. 

2  He  hazards  the  conjecture  that  "  assessments  upon  personal  estates,  if  given 
in  as  elsewhere  upon  oath,  would  bring  that  branch  which  of  itself  is  most  dark  to 
a  sufficient  clearness." —  Verbum  Sapienti;  or  .  .  .  the  Method  of  raising  Taxes 
in  the  most  equal  manner,  p.  17  (Appended  to  his  Political  Anatomy  of  Ireland, 
edition  of  1691).      Cf.  Seligman,  Essays  in  Taxation,  p.  48. 

3  They  may  be  found  in  chap.  xv.  of  A  Treatise  of  Taxes. 

4  This  he  terms  "  the  very  perfect  Idea  of  making  a  Leavy  upon  Consump- 
tions."—  Ibid.,  p.  69. 


Those  who  discuss  the  General  Excise          21 

this  may  be  "too  laborious,"  Petty  suggests  as  an  alternative 
scheme  that  "we  ought  to  enumerate  a  Catalogue  of  Com- 
modities, such  whereof  accompts  may  be  most  easily  taken," 
but  "  being  withall  such,  as  are  to  be  as  near  Consumption  as 
possible." 

The  views  of  Petty  gradually  diffused  themselves  through- 
out the  community,  keeping  pace  with  the  ever-widening  use 
of  indirect  taxes  on  consumption.  Many  of  the  writers  of  the 
close  of  the  seventeenth  century  now  became  ardent  advocates 
of  the  general  excise.  The  author  of  an  interesting  pam- 
phlet, after  giving  a  definition  of  excise,1  proceeds  to  explain 
that,  although  the  "  makers  or  Factors  "  of  commodities  ad- 
vance the  money,  they  really  shift  the  tax  to  the  public  with- 
out the  latter  being  aware  of  it.  This  constitutes,  in  his  eyes, 
the  great  advantage  of  the  excise ;  for  if  the  tax  were  imposed 
directly  on  the  consumers,  it  would  give  rise  to  great  com- 
plaint.2 The  author  is  very  careful,  however,  to  emphasize 
the  necessity  of  taxing  only  those  articles  which  are  neces- 
saries of  life  and  in  universal  use.  In  this  way,  he  asserts, 
not  only  will  the  revenue  be  large,  but  the  principle  of  uni- 
versality of  taxation  will  be  carried  out.3 

The  same  belief  in  the  excise,  on  the  score  of  its  reaching 

1  "  When  we  speak  of  an  Excise,  we  mean  .  .  .  the  whole  Duties  of  any  kind 
whatsoever,  that  are  charged  upon  any  Goods  or  Commodities  expended  within 
the  Kingdom."  — A  Discourse  (by  way  of  Essay)  humbly  offered  to  the  Considera- 
tion of  the  Honourable  House  of  Commons,  towards  the  Raising  Moneys  by  an 
Excise,  demonstrating  the  Conveniency  of  Raising  Moneys  that  Way.     By  W.  C., 
Esq.     London,  1695/6,  p.  3. 

2  "The  Money  being  deposited  by  the  Makers  or  Factors  who  take  it  again,  in 
the  Price  of  them,  at  the  Sale,  the  People  pay  it  insensibly  in  the  Value  of  the 
Goods  they  buy;  for  we  must  not  think  that  the  Merchants  or  Traders  pay  all  the 
Money  of  the  Customs  and  Excise  ;  they  are  but  the  Depositors  of  it,  and  the  Peo- 
ple paying  it  in  a  way  so  secret  and  insensible,  it  meeteth  not  with  any  Contradic- 
tion from  them,  as  it  would  do,  were  they  themselves  to  lay  down  the  present 
money."  —  Ibid.,  p.  4. 

3  This  plan  is  "that  whatsoever  Commodities  be  made  Excisable,  are  to  be  of 
a  large,  universal  and  necessary  Expence :    Of  a  large  Expence,  otherwise,  there 
will  be  a  great  Noise  to  little  Purpose.     If  it  be  of  an  Universal  Expence,  then 
every  Man  will  bear  his  Lot.     If  it  be  of  Necessary  Expence,  there  will  be  no 
avoiding  the  Use  of  that  Commodity."  —  Ibid.,  p.  8. 


22  Shifting  and  Incidence  of  Taxation 

the  entire  mass  of  the  consumers,  is  found  in  the  work  of 
Burnaby,  who  advocated  an  extension  of  some  of  the  internal 
duties  on  commodities.  His  particular  scheme  was  the  im- 
position of  a  tax  on  malt,  which  in  his  opinion  "  will  be  less 
felt  than  usually  Taxes  are,  by  reason  every  Person  will  pay 
Proportionable  in  the  Price  of  Malt."1  He  lays  down  his 
general  principle  as  follows :  "  The  more  universal  any  Tax 
is,  it  is  to  be  supposed  (unless  in  some  Particular  Cases)  to  be 
the  more  equal."  Then  follows  the  minor  premise :  "  I  pre- 
sume, no  Person  will  deny  that  such  a  Tax  will  prove  so  uni- 
versal, that  not  any  Person  will  escape  paying  his  Proportion 
according  to  his  consumption."  From  all  of  which  it  is  easy 
to  draw  the  conclusion  that  "no  Person  can  complain;  who 
Consumes  little,  will  have  but  little  to  pay." 

Another  writer,  commenting  upon  some  of  Petty's  state- 
ments, puts  very  forcibly  the  case  for  the  general  excise,  of 
which  he  says,  "  I  must  allow,  'tis,  singly  considered,  perhaps 
the  most  equal,  and  Innocent  of  any  particular  way  of  Taxing, 
commonly  proposed  or  discoursed  of."  2  Not  only  is  every 
man,  he  thinks,  his  own  assessor,  but  the  tax  is  paid  by  the 
final  consumer  almost  unconsciously;  it  conduces  to  thrift, 
and  it  spares  the  land,  which  is  the  real  source  of  public 
wealth.3  Nevertheless  he  is  alive  to  some  of  its  shortcom- 

1  Two  Proposals,  Humbly  Offered  to  the  Honourable  House  of  Commons,  now 
assembled  in  Parliament.    I.    That  a  Duty  be  laid  on  Malt,  in  the  stead  of  the 
present  Duty  on  Beer  and  Ale.     II.   That  a  Duty  be  laid  on  Malt,  and  the  pres- 
ent Duty  on  Beer  and  Ale  be  continued.    By  A.  Burnaby,  of  the  Middle-Temple, 
Gent.     London,  1696,  p.  2.     Cf.  p.  24.     Much  the  same  idea  is  contained  in 
another  pamphlet  by  Burnaby,  entitled :  An  Essay  upon  the  excising  of  Malt,  as 
also  the  present  Case  of  Tallies  considered.     London,  1696. 

2  "Excepting,"  he  adds,  like  all  the  writers  of  the  time,  "Imposts  on  some 
Forreign  hurtful  Superfluities,  for  the  due  regulating  of  Trade."  —  A  Letter  from  a 
Gentleman  in  the  Country  to  his  Friend  in  the  City:  touching  Sir   William 
Petty1  s  Posthumous  Treatise  ;  entituled  Verbum  Sapienti,  etc.   London,  1691,  p.  14. 
This  tract  has  sometimes  been  ascribed,  but  probably  without  good  reason,  to 
Sir  Thomas  Culpeper. 

3  "  It  hath  a  notable  Air  and  Aspect  of  Freedom,  every  one  being  indeed  his  own 
Assessor :    It  rises  almost  insensibly,  bringing  the  Multitude  (who  are  more  apt  to 
murmur  at  integral  Taxes),  without  much  Grudging,  to  pay  their  Quota's  in  this. 
It  affects  not  immediately  the  Fund  of  Land,  as  our  sole  Land-Taxes  mischievously 


Those  who  discuss  the  General  Excise          23 

ings,1  and  queries  whether  the  object  of  relieving  the  land 
from  excessive  taxation  may  not  perhaps  be  more  conven- 
iently attained  in  another  way.2 

A  considerable  number  of  other  writers,  who  believed  that 
the  excise  would  be  shifted  to  the  mass  of  consumers,  now 
began  to  express  their  doubts  as  to  the  beneficence  of  the 
tax  in  general.  Several  went  no  further  than  to  criticise  the 
rate  of  the  tax,  admitting  the  validity  of  the  principle  of 
the  excise,  but  desiring  necessaries  to  be  taxed  at  a  lower 
rate.  Thus  Sheridan  contends  that  "the  Excise,  if  equally 
imposed,  were  the  best  and  easiest  of  all  taxes,"3  and  ad- 
vances the  usual  arguments  in  its  favor.4  But  in  discussing 
some  of  the  special  excises,  such  as  the  beer-tax,  he  main- 
tains that  they  should  have  been  levied  on  the  richer  classes, 
rather  than  on  the  workingman.5  It  is  perhaps  his  uncer- 
tainty as  to  the  real  benefits  of  the  excise  that  leads  him  to 
propose  as  a  possible,  but  novel,  substitute  a  tax  on  bache- 

do :  And  so  powerfully  doth  it  recommend,  indeed  preach  Frugality,  that,  to  say 
the  truth,  It  in  a  manner  condemns  all  Unthrifts,  as  meer  Ideots  or  Lunaticks."  — 
Ibid.,  p.  14. 

1  "Excise,  you  know,  hath  obtained  a  current  Repute  of  perfect  Equality: 
Now  I  by  no  means  admit  of  that ;  not  only  Niggards,  but  all  those  whose  Condi- 
tion obliges  them  not  to  live  Honourably  upon  their  Demeans,  at  pleasure  avoid- 
ing it." 

2  See  below,  p.  68. 

8  A  Discourse  on  the  Rise  and  Power  of  Parliaments,  of  Laws,  of  Courts  of 
Judicature,  of  Liberty,  Property,  and  Religion,  of  Taxes,  Trade  and  of  the 
Interest  of  England  in  Reference  to  France.  In  a  Letter  from  a  Gentleman  in 
the  Country  to  a  Member  of  Parliament.  [By  Thomas  Sheridan.]  London, 
1 677,  chap,  xiii,  "  of  Taxes."  Reprinted  as  a  separate  volume  in  Some  Revelations 
in  Irish  History ;  or,  Old  Elements  of  Creed  and  Class  Conciliation  in  Ireland. 
Edited  by  Saxe  Bannister.  London,  1870. 

*  **  It  ought  to  be  laid  upon  all  things  ready  to  be  consumed.  This  puts  it  into 
the  power  of  every  man  to  pay  more  or  less,  as  he  resolves  to  live  loosely  or  thrift- 
ily; by  this  course  no  man  pays  but  according  to  his  enjoyment  or  actual  riches, 
of  which  none  can  be  said  to  have  more  than  what  he  spends;  true  riches  con- 
sisting only  in  the  use."  —  Ibid.,  p.  172. 

5  "To  speak  the  truth  in  good  conscience,  this  branch  ought  to  have  been 
imposed  on  the  nobles  and  estated-men  rather  than  on  the  artificer  and 
labourers,  who  were  very  slenderly  concerned  in  the  grounds  of  it."  —  Ibid., 
P-  '73- 


24  Shifting  and  Incidence  of  Taxation 

X* 

lors.1  In  much  the  same  spirit  the  author  of  the  celebrated 
Britannia  Languens^  advocates  an  excise  primarily  on  the 
superfluities  of  the  rich,  and  maintains  that  if  excises  are 
levied  on  ordinary  necessaries  at  all  they  must  be  very  low 
ones.3  A  little  later  we  find  the  view  that  high  excises  are 
clearly  pernicious,  and  that  revenue  should  be  derived  rather 
from  "small  excises"  on  commodities  which  had  hitherto 
escaped  taxation.4  Finally,  the  growing  belief  that  high 
excises  would  ultimately  affect  the  consumer  led  some  writers 
to  advocate  particular  kinds  of  excises  for  the  precise  pur- 
pose of  diminishing  extravagant  consumption.  A  good  ex- 
ample of  this  is  the  proposal  to  tax  bricks  in  order  to  check 
the  growth  of  London  at  the  expense  of  the  rural  districts.6 

1  "I  have  thought  of  a  sort  of  tax  which  I  believe  is  perfectly  new  to  all  the 
world.  ...  It  is  a  tax  upon  celibate,  or  upon  unmarried  people,  viz. :   that  the 
eldest  sons  of  gentlemen,  and  other  degrees  of  nobility  upwards,  and  all  other 
persons  not  married  by  the  times  limited  as  aforesaid  [from  twenty  to  twenty-five 
years  of  age],  shall  pay  per  annum  a-piece  these  following  rates,  etc.,  etc. ;  and 
all  married  men  not  cohabiting  with  their  wives  to  pay  quadruple."  —  A  Discourse 
on  the  Rise  and  Power  of  Parliaments,  pp.  177,  179. 

2  Britannia  Languens,  or  a  Discourse  of  Trade  :  shewing  the  Grounds  and 
Reasons  of  the  Increase  and  Decay  of  Land-Rents,  National  Wealth  and  Strength, 
etc.     London,  1680. 

8  "  But  since  I  have  now,  and  before  mentioned  Excises,  and  have  observed 
some  men  of  Parts,  almost  to  startle  at  the  naming  of  a  new  Excise,  I  shall  thus 
far  explain  and  vindicate  myself,  and  the  proposal :  First,  I  shall  agree  that  such 
Excises  as  affect  and  over-burthen  the  beneficial  parts  of  Trade,  are  of  pernicious 
Consequence.  Secondly,  that  an  Universality  of  Excise  is  both  inconvenient  and 
unnecessary;  but  that  there  may  be  Excises  Imposed  on  many  Superfluities,  and 
Excesses,  in  Meats,  Drinks,  or  Equipages,  or  upon  some  imported  Goods  Con- 
sumed at  home,  which  would  be  no  prejudice  to  any  kind  of  Trade;  being  no  clog 
upon  our  Exports,  or  Re-exports ;  or  perhaps,  a  very  small  Excise  on  ordinary 
Meats,  Drinks,  and  Apparel,  might  be  supportable."  —  Ibid.,  p.  294. 

4  "  High  Customs  and  Excises  are  great  Obstructions  to  Trade.  .  .  .    This 
Grievance  might  be  redressed  by  moderating  the  excessive  Duties,  and  making  the 
Excises  more  universal."     The  author  therefore  proposes  "  a  new  Fund  by  small 
Excises  on  Things  which  have  not  been  yet  Taxed."  —  A  Proposal  for  the  Payment 
of  the  Publick  Debts,  and  an  Account  of  some  Things  mentioned  in  Parliament 
on  that  Occasion.     London,  1714,  p.  20. 

5  "  The  Duty  on  Bricks  and  Tiles  may  give  a  seasonable  Check  to  the  wanton 
and  extravagant  Humour  of  Building,  particularly  about  this  Metropolis,  whereby 
the  Head  is  likely  to  grow  too  big  for  the  Body."  — Animadversions  and  Obser- 


Those  who  discuss  the  General  Excise          25 

The  authors  hitherto  discussed,  holding  to  the  doctrine 
that  a  tax  on  the  producer  or  dealer  is  shifted  to  the  con- 
sumer, all  agree  that  excises  are  desirable,  although  they 
differ  somewhat  in  the  intensity  of  their  desire  for  such  a 
method  of  revenue.  But  we  now  meet  with  a  class  of  writers 
who  hold  the  same  theory  of  incidence,  while  at  the  same 
time  they  strenuously  object  to  all  excises,  precisely  because 
they  fall  on  the  consumers.  They  accept  the  doctrine  that 
excises  are  shifted  to  the  consumer,  but  they  do  not  believe 
that  the  consumer  ought  to  be  saddled  with  the  entire  load. 
We  meet  with  this  objection  to  excises  very  shortly  after  the 
inauguration  of  the  system.1 

The  growing  opposition  is  well  reflected  in  a  Scotch  pam- 
phlet written  at  the  beginning  of  the  eighteenth  century,  in 
which  a  melancholy  picture  of  the  future  of  the  kingdom  is 
traced,  and  the  gradual  pauperization  of  the  whole  com- 
munity is  predicted.2  But  it  was  especially  at  the  time  of 
Walpole's  excise  scheme  that  this  opinion  as  to  the  perni- 

vations  upon  a  Treatise  entituled  Some  Calculations  and  Remarks  relating  to  the 
present  State  of  the  publick  Debts  and  Funds  .  .  .  by  Archibald  Hutcheson  .  .  .  to 
which  is  added  a  New  Proposition  to  raise  Money  for  the  Use  of  the  Publick. 
Humbly  submitted  to  the  Consideration  of  both  Houses  of  Parliament,  etc.  Lon- 
don, 1718,  p.  47.  The  author  joins  to  this  recommendation,  a  proposal  for  a  tax 
on  plate. 

1  One  of  these  early  writers  expresses  himself  very  vehemently,  as  follows: 
"That  the  Excise  of  Ale,  Beer,  Perry,  and  Syder,  and  the  charges,  affliction,  and 
troubles,  which  it  brings  upon  the  people,  which  before  our  times  of  misery, 
would  have  brought  death  and  ruine  any  private  contriver;  and  was  at  the  first 
created  by  Oliver  and  his  Impes  to  maintain  a  cursed  Rebellion,  and  set  up  a 
destroying  and  detestable  Anarchy,  may  be  abolished,  and  taken  away,  and  the 
Nation  restored  to  the  freedom  and  quiet  which  they  formerly  enjoyed  under  this 
our  ancient  and  excellently  composed  Monarchy."  —  Restauranda  :  or  the  Neces- 
sity of  Publick  Repairs,  by  setling  of  a  certain  and  Royal  yearly  Revenue  for  the 
King.     [By  Fabian  Philips.]     London,  1662,  p.  95.     A  still  earlier  fulmination 
was :  A  Declaration  against  the  illegal,  detestable,  oft  condemned  new  Tax  and 
Extortion  of  Excise  in  general,  and  for  Hops  (a  native  uncertain  commodity}  in 
particular.     By  William  Prynne,  Esq.     London,  1654. 

2  "  Our  Merchants  are  the  first  Advancers  of  the  Taxes  that  are  upon  Trade, 
but  they  are  refounded  with  double  Interest  by  the  Noblemen  and  Gentlemen, 
who  for  the  most  part  consume  all  the  valuable  Goods  Imported. 

"  Our  Peers  and  Barons,  may  easily  judge,  how  far  they  will  be  able  to  make 


26  Shifting  and  Incidence  of  Taxation 

cious  effects  of  the  excise  was  expressed  with  great  energy.1 
Some  of  the  writers,  however,  who  were  then  quite  willing 
to  abandon  consumption  as  the  general  fiorm  of  taxation, 
based  their  opposition  to  excises  primarily  on  the  ground 
that  the  tax  falls  with  greater  severity  on  the  poorer  con- 
sumer, and  that  it  is  to  be  reprehended  for  this  reason. 

One  of  the  earliest  authors  to  show  this  defect  in  the 
excise  is  Gary.  He  starts  out  with  the  general  proposition 
that  the  tax  system  must  be  so  contrived  "  that  the  Poor  bear 
little  or  none  of  the  Burthen,  their  Province  being  more  prop- 
erly to  labour  and  fight  than  pay." 2  Not  only  does  a  man 
who  works  for  his  income  part  with  it  with  reluctance,  says  he, 
but  the  revenue  accruing  to  the  government  from  these  small 

any  Consumpt  of  these  Goods,  or  pay  what  they  get,  when  there  is  not  only  Taxes 
on  their  Land,  but  on  the  Product  of  their  Land,  viz.  their  Malt,  Beer  and  Ale. 

"  Our  Burgesses  may  soon  consider,  that  when  the  Peers  and  Barons  have  no 
Money,  their  Trade  must  decay. 

"  Our  Mechanicks  will  have  no  difficulty  to  believe,  that  if  there  be  no  Trade, 
and  no  circulation  of  Money,  their  best  Trade  will  be  a  Plantation  Trade. 

"  And  in  the  last  place,  when  our  Commons  buy  such  dear  Ale,  pay  so  much 
Tax  on  Salt,  have  nothing  or  a  very  small  Price  for  the  Fruit  of  their  Labour; 
they  will  never  be  in  a  Condition  to  pay  their  Farms;  so  in  place  of  Riches,  Pov- 
erty will  soon  circulate  among  us."  —  A  Short  View  of  our  present  Trade  and 
Taxes  compared  -with  what  these  Taxes  may  amount  to  after  the  Union.  With 
some  Reasons  why  (if  we  enter  in  an  Union?)  our  Trade  should  be  under  our 
own  Regulations.  1706,  pp.  5,  6.  The  work  is  sometimes  ascribed  to  Daniel 
De  Foe. 

1  Cf.  the  following  passage :  "  Excises  first  got  a  footing  amongst  us  in  the 
Civil  Wars,  which  was  a  time  of  universal  Confusion ;   and  they  were  then  so 
odious  that  each  party  branded  the  other  with  being  the  Authors  thereof;  but 
before  that,  they  were  so  much  dreaded,  that  a  Member  of  Parliament  was  very 
near  being  sent  to  the  Tower  for  only  mentioning  their  name  in  the  House,  tho' 
with  no  evil  design :    What  then  would  they  have  done  to  the  Man,  who  should 
have  proposed  multiplying  them,  when  the  Nation  groaned  under  the  Burthen  of 
so  many,  as  we  do  already."  —  A  Word  to  the  Freeholders  and  Burgesses  of  Great 
Britain,  being  Seasonable  and  serious  Remarks  upon  the  inconsistent  Conduct  of 
certain  Boroughs,  in  sending  Instructions  to  their  Representatives  to  oppose  the 
Excise  Bill,  and  yet  re-electing  them  after  their  being  rewarded  with  Places  for 
voting  for  the  same.     London,  1733,  p.  31. 

2  An  Essay  on  the  State  of  England  in  relation  to  its  Trade,  its  Poor  and  its 
Taxes,  for  carrying  on  the  present  War  against  France.     By  John  Gary,  Mer- 
chant in  Bristoll.     Bristoll,  1695,  p.  173. 


X 

Those  who  discuss  the  General  Excise          27 

payments  will  after  all  be  insignificant.1  The  vital  objection 
to  the  excise,  however,  is  its  inequality ;  for  although  the  rich 
man  consumes  more  than  the  poor  man,  the  tax  is  paid  in  the 
one  case  out  of  the  surplus  over  and  above  all  needful  expendi- 
ture, but  in  the  other  case  out  of  a  fund  which  barely  suffices 
for  the  necessaries  of  life.2 

This  view,  which  closely  approaches  the  one  held  by  mod- 
ern democracies,  was  occasionally  emphasized  in  the  following 
decades.  One  vigorous  writer,  early  in  the  eighteenth  cen- 
tury, objects  to  "  those  cruel  and  unequal  Taxes,  which  pinch 
and  afflict  those  People  chiefly  who  are  least  able  to  support 
Taxes."3  He  advances  what  he  calls  a  "true,  tho'  perhaps 
not  a  regularly  determin'd  Observation  " ;  namely,  "  when 
Land  is  Tax'd,  the  Rich  pay  more  than  the  Poor ;  but  when 
the  Product  of  Land  is  tax'd,  the  Poor  pay  more  than  the 
Rich."  He  proceeds  to  show  that  "the  Rich  pay  for  their 
Land  because  they  have  it;  the  Poor  pay  for  their  daily 
Necessaries,  because  they  have  them  not."  *  Owing  to  his 
belief  that  taxes  on  commodities  are  relatively  more  burden- 
some to  the  poor,  he  favors  the  land  tax,5  together  with  a  tax 
on  funds.6 

1  "  He  that  gets  his  Money  by  the  Sweat  of  his  Brow  parts  not  from  it  with- 
out much  Remorse  and  Discontent,  and  when  all  is  done,  'tis  but  a  little  they  pay, 
therefore  Taxes  that  light  heavy  on  them  (such  as  Chimney-Money,  and  often- 
times a  Poll)  tend  rather  to  unhinge  than  assist  the  Government,  by  disgusting 
such  a  number  of  robust  and  hardy  men  as  carry  a  great  personal  Ballance  in  the 
Kingdom."—  Ibid.,  p.  174. 

2  "  A  general  Excise  cannot  do  well,  for  besides  the  great  Charge  and  Oppres- 
sion of  Officers,  it  shews  no  Respect  to  the  Poor,  but  they  pay  more  than  the 
Wealthiest  of  their  Neighbours  suitable  to  what  they  have ;  for  though  a  rich  Man 
spends  more  in  excisable  things  than  a  poor  Man  doth,  yet  it  is  not  his  All,  whereas 
the  other's  Poverty  gives  him  leave  to  lay  up  nothing,  but  'tis  as  much  as  he  can  do 
to  provide  Necessaries  for  his  Family,  out  of  all  which  he  pays  his  Proportion." 
—  Ibid.,  p.  174. 

8  Fair  Payment  no  Spunge  :  or,  Some  Considerations  on  the  Unreasonableness 
of  Refusing  to  Receive  back  Money  lent  on  Publick  Securities.  And  the  Necessity 
of  Setting  the  Nation  Free  from  the  Insupportable  Burthen  of  Debt  and  Taxes. 
London,  1717.  Chap,  ix,  "Of  Equality  of  Taxes,"  p.  60. 

4  Ibid.,  p.  61. 

5  Ibid.,  p.  67. 

6  Ibid.,  chap,  x,  "Of  Inequalities  in  Taxings,"  p,  71,    See  below,  p.  69. 


28  Shifting  and  Incidence  of  Taxation 

This  view  as  to  the  incidence  of  the  excise  was,  however, 
in  some  danger  of  being  neglected,  when,  toward  the  middle 
of  the  eighteenth  century,  it  was  again  put  forward  by  two 
writers  with  such  force  that  it  left  its  indelible  imprint  on 
general  thought.  One  of  these  authors  goes  so  far  as  to 
break  entirely  with  the  old  theory  of  the  basis  of  taxation, 
and  to  lay  down  the  principle  that  taxes  should  be  levied 
according  to  property  and  not  according  to  consumption. 
The  excise,  says  he,  sins  against  this  cardinal  rule,  and  is 
therefore  convicted  of  inequality.1  But  even  regarded  as  a 
tax  on  property  —  that  is,  on  commodities  —  the  excise  is 
thoroughly  unequal ;  for  not  only  the  tax,  but  a  great  deal 
over  and  above  the  tax,  will  be  shifted  to  the  consumer,  and 
will  hit  the  poor  man  on  his  necessaries.2  Our  author  is, 
however,  so  far  carried  away  by  his  ardor  to  show  the  evils 
of  the  excise  as  to  intimate  that  wages  must  rise  with  the 
increased  price  of  necessaries,  and  that  therefore  the  whole 
community  will  suffer  in  the  end.3  Were  it  not  that  he  puts 
his  emphasis  on  the  first  point  —  the  burden  on  the  poor,  - 
rather  than  on  the  second  —  the  burden  on  the  general  com- 
munity—  he  ought  rather  to  be  included  with  writers  like 
Mun  and  Fauquier.4 

1  "  Excises,  as  they  are  of  all  Impositions  the  most  injurious  to  Liberty,  so  they 
are  the  most  unequal  in  their  Nature,  and  fall  the  most  heavily  on  Property.  .  .  . 
They  are  the  most  unequal,  because  Taxes  should  be  measured  by  Property.  .  .  . 
But  Excises  measure  by  the  Quantity  of  a  Commodity  consum'd :    Whence  the 
Contribution  of  a  poor  Man  with  a  large  Family,  may  exceed  Those  of  a  rich 
Batchelor  of  a  hundred  Times  his  Fortune."  —  An  Appeal  to  the  Public,  in  rela- 
tion to  the  Tobacco  *  *  *  and  a  Revival  of  the  old  Project,  to  establish  a  General 
Excise.     London,  1751,  p.  51. 

2  "  They  fall  most  heavily  on  Property,  more  especially  when  impos'd  on 
Necessaries,  or  on  Commodities  render'd  by  Habit  necessary,  because  they  accum- 
ulate as  they  go;   because  he  that  issues  the  Tax  first,  will  be  paid  for  the  dis- 
bursement and  also  for  the  extraordinary  Difficulties,  Hardships,  and  Visitations 
brought  upon  him  by  them."  — Ibid.,  p.  52. 

3  "  Because  the  Price  of  Labour  rises  with  the  Price  of  the  Commodities  con- 
sum'd by  the  Labourer :  and  because  the  Dearness  of  Labour  affects  the  whole 
Circle  of  our  Commerce,  both  Domestic  and  Foreign.  .  .   .     This  is  sufficient  to 
shew,  that  tho'  the  Trader  is  the  first  Person  pinch'd  on  these  Occasions,  the  Evil 
is  progressive,  and  at  last  both  fastens  and  preys  on  the  whole  Community."  — 
Ibid.,  pp.  52,  53.  *  See  above,  pp.  14  to  18. 


Those  who  discuss  the  General  Excise          29 

The  charge  of  inconsistency  can,  however,  not  be  brought 
against  Sir  John  Nickolls,  the  other  writer  to  show  the  in- 
equality of  general  taxes  on  consumption.  Nickolls  firmly 
held  to  the  opinion  that  when  taxes  reached  the  consumers 
they  stayed  there.1  Taxes  on  consumption,  in  his  opinion, 
are  thoroughly  unjust,  because  they  are  out  of  all  proportion 
to  the  relative  abilities  of  the  taxpayers;  for  abilities  are 
measured  by  property  and  not  by  consumption.2 

The  opposition  to  the  excise  was  also  strengthened  by 
those  who  not  only  pointed  out  that  high  taxes  would  cause 
serious  damage  to  the  consumer  by  compelling  him  to  dimin- 
ish his  consumption,  but  also  showed  that  this  would  involve 
a  serious  loss  of  revenue  to  the  government.  The  point  that 
was  subsequently  so  well  put  by  Dean  Swift,  that  in  the 
arithmetic  of  the  customs  two  and  two  do  not  always  make 
four,  was  already  emphasized  during  the  excise  controversy, 
and  was  declared  equally  applicable  to  internal  duties.3 

1  Remarks  on  the  Advantages  and  Disadvantages  of  France  and  of  Great- 
Britain  with  Respect  to  Commerce,  and  to  the  other  Means  of  Increasing  the 

IVealtk  and  Power  of  a  State.  Being  a  {pretended}  Translation  from  the  Eng- 
lish, written  by  Sir  John  Nickolls  and  printed  at  Leyden  1754.  Translated  out 
of  the  French  Original.  London,  1754. 

2  "That  these  taxes  incurr  the  objection  of  being  unequal,  and  unjust,  in  that, 
for  the  portion  of  things  absolutely  necessary  to  life,  the  poor  and  the  rich  pay  the 
same  sum :  insomuch  that  whereas  the  people  being  supposed  divided  into  two 
parts  pretty  near  equal,  of  which  the  one  has  only  its  industry  to  live  upon,  the 
other  possesses  riches,  enjoys,  and  pays  the  labor  of  the  other :  these  two  halves, 
so  different  in  their  abilities,  share  nevertheless  equally  the  weight  of  these  taxes 
upon  all  the  commodities,  or  rather  necessaries,  of  which  the  consumption  admits 
of  little  or  no  abuse  or  luxury.    The  contribution  is  light,  for  the  batchelors  or 
single  persons,  in  easy  and  idle  circumstances :  but  is  excessive  for  those  usefull 
subjects,  of  whom  the  families  are  numerous,  and  the  fortunes  narrow." — Ibid., 
p.  260.     For  his  practical  propositions,  see  below,  p.  58. 

3  "This  is  a  Truth  which  will,  I  believe,  be  acknowledged  by  all  Traders  in 
general,  it  being  universally  known  that  the  greater  Duty  any  Commodity  pays,  the 
less  of  it  ten-fold  is  consumed;   consequently  if  the  King  has  two  Pence  in  the 
Pound  for  any  Merchandize,  that  before  paid  but  one  Penny,  not  above  a  tenth 
Part  of  that  Merchandize  will  be  consumed,  and  consequently  not  above  a  tenth 
Part  imported;  so  that  upon  the  Ballance  the  Crown  will  be  a  Loser  eight  Parts 
in  ten. "  —  The  Norfolk  Scheme  :  or  a  Letter  to  William  Pulteney,  Esq.  ;  on  the 
Present  Posture  of  Affairs,  particularly  with  Relation  to  the  Scheme  for  altering 


30  Shifting  and  Incidence  of  Taxation 

The  chief  controversy  as  to  the  advisability  of  the  excise 
turned,  however,  on  the  question  of  its  influence  on  the 
laborer,  and  more  especially  of  its  effect  on  the  cost  of  labor. 
Mun  and  his  followers,  it  will  be  remembered,  maintained 
that,  so  far  as  taxes  on  consumption  were  taxes  on  the  neces- 
saries of  life  of  the  laborers,  they  would  be  shifted  to  the 
employers.  Petty  and  his  school,  on  the  other  hand,  held 
that  the  excise  on  necessaries  of  life  would  rest  on  the  work- 
man. But  while  these  latter  writers  agreed  on  the  theory 
of  incidence,  they  drew  different  conclusions  according  to 
their  belief  in  the  efficacy  of  high  or  of  low  wages.  Most  of 
the  writers  of  the  close  of  the  seventeenth  and  the  first  half 
of  the  eighteenth  century  imagined  that  taxes  on  the  neces- 
saries of  life  would  constitute  a  great  stimulus  toward  an  im- 
provement in  the  condition  of  the  laborer,  in  sobriety,  care- 
fulness and  efficiency.  A  tax  on  labor  would  thus,  they 
thought,  be  a  real  spur  to  industry  and  commerce,  and  a 
benefit  to  the  community  in  general;  for  low  wages  mean 
low  cost  of  production.  When  the  necessaries  of  life  are 
taxed,  runs  the  argument,  not  only  will  the  laborer  have  to 
work  harder  and  longer  to  maintain  himself,  — which  will  be 
a  benefit  to  him  —  but,  on  the  other  hand,  there  will  be  a  re- 
duction in  the  labor-cost  to  the  employer,  which  will  be  an 
advantage  to  the  community.  It  was  only  very  slowly  that 
this  belief  in  the  efficacy  of  low  wages  was  replaced  by  what 
we  are  to-day  accustomed  to  call  the  theory  of  the  economy 
of  high  wages.  With  it  came  a  corresponding  distrust  of  the 
policy  of  taxes  on  the  necessaries  of  life.  But  both  the  advo- 
cates and  the  opponents  of  the  excise  from  this  point  of  view 
based  their  practical  conclusions  on  the  same  theory  of  inci- 
dence; namely,  that  a  tax  on  necessaries  would  rest  on  the 
laborer.1 

the  Method  of  Collecting  the  Revenues,  by  converting  the  Customs  into  Excises,  etc. 
London,  1733,  p.  27. 

1  A  mention  of  a  few  of  the  writers  discussed  in  the  following  pages  may  be 
found  in  Schulze-Gavernitz,  Der  Grossbetrieb,  1892,  pp.  2-10,  recently  translated 
by  O.  S.  Hall,  under  the  title  of  The  Cotton  Trade  in  England  and  on  the 
Continent.  London,  1895.  ^ut  ^e  does  not  treat  them  at  all  from  the  fiscal 


Those  who  discuss  the  General  Excise          31 

The  earliest  trace  of  the  doctrine  that  high  wages  are  bad 
not  only  for  the  laborer  but  also  for  the  community  is  found 
in  a  work  of  Thomas  Manley.  He  points  out  that  high  wages 
are  the  principal  cause  of  England's  inability  to  compete  with 
Holland  in  the  production  of  manufactures.  At  the  same 
time,  he  contends,  high  wages  do  the  laborer  no  good,  because 
not  only  do  "the  men  have  just  as  much  the  more  to  spend 
in  tipple,  and  remain  now  poorer  than  when  their  wages  was 
less,"  but  "  they  work  so  much  the  fewer  days  by  how  much 
the  more  they  exact  in  their  wages." x  Another  writer  shortly 
after  expresses  very  much  the  same  view  as  to  the  "  mischiev- 
ousness  "  of  high  wages,2  and  suggests  that  an  endeavor  be 
made  "  to  reduce  the  wages  of  our  Manufacturers  to  a  more 
sober  and  less  expensive  way  of  living." 

Neither  Manley  nor  his  anonymous  follower  proposed  the 
specific  expedient  of  a  tax  on  wages.  Manley  contented  him- 
self with  stating  in  general  terms  that  the  chief  concern  of 
England  was  to  "subdue  our  wages";3  and  the  anonymous 
writer  recommended  a  rather  drastic  but  indirect  method  to 
reduce  wages.4  But  the  theory,  when  once  put  forth,  could 

point  of  view.     Cf.  also  the  few  words  in  Brentano,  Das  Verhaltniss  von  Arbeits- 
lohn  und  Arbeitszeit  zur  Arbeitsleistung,  1875;  2&  ed.,  1893,  P«  57- 

1  Usury  at  Six  per  Cent,  examined,  and  Found  unjustly  charged  by  Sir  Tho. 
Culpeper  and  J.  C.  with  many  Crimes  and  Oppressions,  "whereof  'tis  altogether 
innocent.     Wherein  is  shewed  the  necessity  of  retrenching  our  Luxury  and  -vain 
consumption  of  Forraign  Commodities,  imported  by  English  Money  :  also  the  reduc- 
ing the  Wages  of  Servants,  Labourers,  and  Workmen  of  all  sorts,  which  raiseth 
the  value  of  our  Manufactures,  15  or  20  per  Cent,  dearer  than  our  Neighbours  do 
afford  them,  by  reason  of  their  cheap  Wages,  etc.    By  Thomas  Manley,  Gent.    Lon- 
don, 1669,  p.  19. 

2  "  Handicraft  Tradesmens  high  wages,  which  they  exact  for  their  work,  is 
greatly  mischievous,  not  only  to  every  man  who  hath  occasion  to  use  them  .  .  . 
but  it  is  destructive  to  Trade,  and  hinders  the  consumption  of  our  Manufactures  by 
Foreigners."  —  The  Grand  Concern  of  England  explained;  in  several  Proposals 
offered  to  the  Consideration  of  the  Parliament.     By  a  Lover  of  his  Countrey  and 
Well-wisher  to  the  Prosperity  both  of  the  King  and  Kingdoms.  London,  1673,  p.  54. 

8  Usury  at  Six  per  Cent.,  p.  22. 

4  His  plan  is  "  to  enjoyn  all  English  men  not  to  wear  anything  but  what  is  of 
our  own  Growth  and  Manufacturies;  which  will  encrease  a  Consumption  at  home, 
and  set  those  at  work  who  now  live  idle,  and  by  giving  them  full  work,  would 
bring  down  their  wages." —  The  Grand  Concern,  p.  55. 


32  Shifting  and  Incidence  of  Taxation 

not  fail  to  draw  attention  to  its  obvious  corollary.  The  de- 
mand for  the  use  of  the  power  of  taxation  as  an  instrumen- 
tality of  social  reform  and  the  regulation  of  labor  soon  made 
its  appearance  —  for  the  first  time,  perhaps  —  in  the  work  of 
John  Houghton.1 

In  the  heading  of  the  chapter  devoted  to  this  subject, 
Houghton  lays  down  the  principle  "  that  this  Kingdom  will 
thrive  more,  and  the  Manufactors  live  better,  and  sell  their 
Manufactures  Cheaper  when  Provisions  are  Dear,  than 
when  Cheap." 2  His  major  premise  is  that  "  if  there  be  of 
Food  a  Plenty,  Laziness  follows  it."  3  When  the  workmen 
get  high  wages,  they  stop  work  and  spend  their  earnings  in 
debauchery.  The  ordinary  laborer  in  England  earns  enough 
in  three  or  four  days'  labor  to  support  him  the  entire  week.4 
If  he  had  to  pay  more  for  his  provisions,  he  would  work 
harder  and  produce  more.5  Thus  dearness  would,  in  the 
end,  bring  about  industry  and  plenty.  Houghton  therefore 
proposes,  in  order  to  maintain  this  artificial  dearness,  not 
only  an  export  bounty  on  corn,  but  an  increase  of  the  excise 
on  beer,  ale  and  spirits,  as  well  as  the  imposition  of  an 
"  Excise  of  a  groat  a  pound  on  Wool."  6  The  effect  of  this 
will  be,  he  thinks,  that  the  "  meaner  sort  of  People  will  not 

1  A  Collection  of  Letters  for  the  Improvement  of  Husbandry  and  Trade.     By 
John  Houghton,  Fellow  of  the  Royal  Society.     London,  1681.     The  passages 
quoted  are  found  in  the  second  volume,  London,  1683. 

2  Ibid.,  p.  174. 
*  Ibid.,  p.  175. 

4  "  When  the  Frame-work  Knitters,  or  Makers  of  Silk-Stockings  had  a  great 
Price  for  their  Work,  they  have  been  observed  seldom  to  work  on  Mundays  and 
Tuesdays,  but  to  spend  most  of  that  time  at  the  Ale-House  and  Nine-Pins.  .  .  . 
The  Weavers,  'tis  common  with  them  to  be  drunk  on  Munday,  to  have  their 
Heads  ach  on  Tuesday,  and  their  Tools  out  of  order  on  Wednesday.     As  for  the 
Shoemakers,  they'l  rather  be  hang'd  than  not  remember  St.  Crispin  on  Munday ; 
and  it  commonly  holds  as  long  as  they  have  a  penny  of  Money  or  pennyworth  of 
Credit." — Ibid.  p.  177.      His  account  of  "most   other  Professions  that  live  by 
Labour  "  is  equally  delectable. 

5  "  If  by  the  Dearness  aforesaid  the  Manufactors  cannot  keep  up  their  habitual 
Port  by  working  three  days  in  a  Week,  they  will  work  four  days,  or  find  out 
Engines  or  new  Contrivances  equivalent."  —  Ibid.,  p.  181. 

6  Ibid.,  p.  183. 


Those  who  discuss  the  General  Excise          33 

be  diverted  from  better  Imployments  " ;  but  that  "  this  part 
of  their  Provision  will  be  dearer  to  them,  and  will  oblige  them 
to  more  Industry,  whereby  they  will  procure  more  Manufac- 
ture to  sell  cheaper." 1 

Petty  himself,  whose  general  theory  on  the  incidence  of  taxa- 
tion has  already  been  explained,2  in  a  subsequent  treatise  ex- 
pressed views  in  substantial  agreement  with  those  of  Hough- 
ton.  He  significantly  heads  the  chapter  in  question  "That 
some  kind  of  Taxes  and  Publick  Levies  may  rather  increase 
than  diminish  the  Wealth  of  the  Kingdom."  3  He  maintains 
that  when  the  price  of  food  is  low,  laborers  can  scarcely  be 
procured  at  all,4  and  he  accordingly  recommends  as  extremely 
desirable  a  tax  on  the  necessaries  of  life.5 

The  belief  that  an  increased  cost  of  living  would  be  an 
incentive  to  industry  is  found  in  many  of  the  writers  of  this 
period.  Not  all,  however,  desire  to  secure  this  artificial  dear- 
ness  through  the  medium  of  taxation.  Thus,  Sir  William 
Temple  thought  that  the  troubles  of  Ireland  could  easily  be 
remedied  by  "  an  Increase  of  People  in  the  Country  to  such 
a  degree  as  may  make  things  necessary  to  Life  dear,  and 
thereby  force  general  industry  from  each  Member  of  a 
Family  (Women  as  well  as  Men)."  6  In  the  same  way  another 
writer,  soon  after,  sought  to  prove  that  "  Labour  is  always 
dearest  when  Provisions  are  cheapest,"  7  and  that  an  increase 

1  A    Collection  of  Letters  for  the  Improvement  of  Husbandry  and   Trade, 
p.  184. 

2  Above,  p.  1 8. 

8  Political  Arithmetick.     By  Sir  William  Petty.     London,  1690,  chap.  ii. 

4  "  It  is  observed  by  Clothiers  and  others,  who  employ  great  numbers  of  poor 
people,  that  when  Corn  is  extremely  plentiful,  that  the  Labour  of  the  poor  is  pro- 
portionably  dear :  And  scarce  to  be  had  at  all  (so  licentious  are  they  who  labour 
only  to  eat,  or  rather  to  drink)."  —  Ibid.,  p.  45. 

5  Petty  joins  to  this  the  further  recommendation  that  in  times  of  plenty  the 
surplus  food  be  sent  to  "publick  Store-houses." 

6  An  Essay  upon  the  Advancement  of  Trade  in  Ireland.     By  Sir  William 
Temple.     Published  in  his  Miscellanea,  ed.  1693,  part  i,  p.  116. 

7  Some  Thoughts  on  the  Interest  of  Money  in  General,  and  particularly  in  the 
Publick  Funds.      With  Reasons  for  fixing  the  same  at  a  lower  Rate,  with  Regard 
especially  to  the  Landholders.     London,  n.d.  (published  between  1728  and  1740). 
His  argument  is  that  "  People  in  low  Life,  who  work  only  for  their  daily  Bread,  if 

D 


34  Shifting  and  Incidence  of  Taxation 

in  the  price  of  necessaries  will  not  injure  the  laborer,  or  in- 
crease the  cost  to  the  producer. 

The  general  doctrine  that  taxes  really  conduce  to  thrift 
was,  however,  made  more  or  less  popular  in  England  toward 
the  end  of  the  seventeenth  century,  by  appeals  to  the  experi- 
ence of  England's  great  rival, — the  Low  Countries.  Not 
only  did  authors,  like  Temple,1  continually  call  attention  to 
the  Dutch,  but  ample  testimony  to  the  great  benefits  supposed 
to  result  from  the  excise  was  found  in  the  works  of  the  Dutch 
writers  themselves,  whose  ideas  were  made  accessible  to  the 
English  public  through  translation.  Thus,  the  author  of  the 
celebrated  Political  Maxims,  who  was  always,  but  erroneously,2 
supposed  in  England  to  have  been  the  renowned  Dutch 
statesman,  John  De  Witt,  advocates  the  imposition  of  excises 
on  the  laborers,  because  "it  is  evident  that  all  the  said  ways 
for  raising  of  Mony  will  excite  the  Commonalty  to  Ingenuity, 
Diligence  and  Frugality."  3 

This  doctrine  of  the  value  of  low  wages  continued  far  into 
the  eighteenth  century.  One  of  its  prominent  advocates 
toward  the  middle  of  the  century  was  the  celebrated  Josiah 

they  can  get  it  by  three  Days  Work  in  a  Week,  will  many  of  them  make  Holiday 
the  other  three,  or  set  their  own  Price  on  their  Labour,"  p.  73. 

1  The  following  passage  from  Temple  was  much  talked  about :     "  The  chief 
Fonds  out  of  which  this  (Revenue)  rises  is  the  Excise  and  the  Customs :  The  first 
is  great  and  so  general,  that  I  have  heard  it  observ'd  at  Amsterdam,  that  when  in 
a  Tavern,  a  certain  Dish  of  Fish  is  eaten  with  the  usual  Sauce,  above  thirty  several 
Excises  are  paid,  for  what  is  necessary  to  that  small  service." —  Observations  upon 
the  United  Provinces  of  the  Netherlands,  chap,  vii ;  reprinted  in  The  Works  of  Sir 
William  Temple,  Bart.     London,  1720,  i,  pp.  70,  71. 

2  The  True  Interest  and  Political  Maxims  of  the  Republick  of  Holland  and 
West  Friesland.     Written  by  John  De  Witt  and  other  great  Men  in  Holland. 
London,  1702.    The  original  Dutch  edition  was  published  anonymously  in  1662. 
The  real  author  was  Pieter  De  la  Court.     De  Witt  did  indeed  write  one  or  two 
chapters,  but  not  the  ones  in  question.     We  now  know  precisely  what  he  did 
write.     Cf.  Laspeyres,  Geschichte  der  "volkswirthschaftlichen  Anschauungen  der 
Niederlander  und  ihrer  Liter atur  zur  Zeit  der  Republik.     1863,  pp.  1 8,  19. 

8  The  True  Interest,  p.  109.  In  An  Essay  on  Trade  and  Commerce,  men- 
tioned below,  p.  37,  note  2,  the  maxim  is  quoted  on  p.  49  in  a  little  different  lan- 
guage, and  ascribed  to  De  Witt.  The  erroneous  ascription  is  also  followed  in 
Arthur  Young,  The  Farmer's  Letters,  p.  29,  and  in  Schulze-Gavernitz,  Der  Gross- 
betrieb,  p.  3. 


Those  who  discuss  the  General  Excise          35 

Tucker.  Tucker  turns  his  attention  to  "  the  lower  Class  of 
People  "  and  holds  that  if  they  "  are  subject  to  little  or  no  Con- 
troll,  they  will  run  into  Vice :  Vice  is  attended  with  Expence, 
which  must  be  supported  either  by  an  high  Price  for  their 
Labour,  or  by  Methods  still  more  destructive." 1  In  England 
"  the  men  are  as  bad  as  can  be  described :  who  become  more 
vitious,  more  indigent  and  idle,  in  proportion  to  the  advance 
of  Wages  and  the  Cheapness  of  Provisions."  2  Tucker  then 
proceeds  to  discuss  the  plan  of  a  "certain  very  ingenious 
Gentleman,  and  himself  a  great  Manufacturer  in  the  Cloth- 
ing Way  "  to  impose  a  special  tax  on  the  necessaries  of  life. 
This  gentleman  had  observed  "  that  in  exceeding  dear  Years 
when  Corn  and  Provisions  are  at  an  extravagant  Price,  then 
the  Work  is  best  and  cheapest  done :  —  but  that  in  cheap 
Years,  the  Manufacturers  are  idle,  Wages  high,  and  Work  ill 
done."  "  Therefore,"  adds  Tucker,  "  he  infers,  that  the  high 
Duties,  Taxes  and  Excises  upon  the  Necessaries  of  Life  are 
so  far  from  being  a  Disadvantage  to  Trade  .  .  .  that  they 
are  eventually  the  chief  Support  of  it:  —  and  ought  to  be 
higher  still,  in  order  to  oblige  the  Poor  either  to  Work  or 
Starve."  3 

Tucker  observes  that  "  Some  Things  may  certainly  be  said 
in  favour  of  this  Scheme."  But  on  mature  reflection  he  is, 
as  "an  humane  and  compassionate  man,"  a  little  doubtful 
about  it,4  and  thinks  that  his  alternative  plans  of  encourag- 
ing immigration5  and  of  raising  the  pecuniary  limit  of  the 
elective  franchise  6  may  produce  the  same  results  and  "  keep 

1  A  Brief  Essay  on  the  Advantages  and  Disadvantages  which  respectively 
attend  France  and  Great  Britain,  with  Regard  to  Trade,  etc.    By  Josiah  Tucker. 
2d  ed.,  London,  1750,  p.  36.     The  third  edition  of  1753  is  reprinted  in  Lord 
Overstone's  Select  Collection  of  Scarce  and  Valuable  Tracts  on  Commerce,  1859. 

2  Ibid.,  p.  37. 

3  Ibid.,  p.  54. 

4  He  even  speaks  of  it  as  "a  very  singular  scheme." 

6  The  advantage  of  his  "Naturalization"  scheme  is  supposed  to  be  "that  by 
this  means,  the  Price  of  Labour  is  continually  beat  down,  Combinations  of  Jour- 
neymen against  their  Masters  are  prevented,  Industry  is  encouraged  and  an  Emu- 
lation excited."  —  Ibid.,  p.  42.  Cf.  p.  91. 

6  As  a  consequence  of  raising  the  elective  franchise  to  ,£200  for  tradesmen, 


36  Shifting  and  Incidence  of  Taxation 

down  the  Price  of  Labour  and  prevent  any  Combination." 
As  a  result  of  this  "perhaps  the  morals  of  our  Poor  would 
be  as  unexceptionable  and  the  Price  of  Labour  as  cheap  as  in 
any  other  trading  country."  Later,  indeed,  Tucker  changed 
his  opinions  still  further ;  for  he  not  only  became  an  advocate 
of  a  direct  tax  on  luxuries,1  but  finally  abandoned  his  whole 
contention  as  to  the  efficacy  of  low  wages.2 

The  doctrine  that  wages  do  not  rise  with  the  price  of  pro- 
visions was  also  developed  by  several  writers  who  objected 
to  the  restrictions  on  the  exportation  of  wheat.  They  did 
not  deny  that  prices  would  rise,  but  contended  that  high 
prices  of  food  would  mean  more  work  rather  than  higher 
wages.  Arthur  Young,  for  example,  not  only  states  that  "  in 
no  instance  will  you  find  that  labour  is  high,  because  pro- 
visions are  the  same,"  3  but  he  adds  that  "  living  must  be 
rendered  dear  before  that  general  industry,  which  can  alone 
support  a  manufacturing  people,  will  be  rooted  amongst 
them."  *  "  High  taxes,"  he  continues,  "  must  have  operated 
to  render  high  rates  of  labour  necessary  ...  in  those  coun- 
tries where  manufactures  make  the  greatest  shoots." 

The  most  complete  development  of  the  doctrine  that  ex- 
cises are  a  benefit  to  the  laborers  is  found  in  the  anonymous 

"  the  privilege  of  voting  would  become  a  laudable  Inducement  to  every  Artificer 
(not  to  get  Drunk,  or  take  a  paltry  Bribe,  as  at  present  is  the  case)  but  to  be  fru- 
gal and  saving.  .  .  .  The  Number  also  of  the  Poor  would  consequently  be  les- 
sened: the  Price  of  Labour  reduced."  —  A  Brief  Essay,  pp.  52,  53. 

1  See  below,  p.  58. 

2  See  below,  p.  45. 

8  The  Expediency  of  a  Free  Exportation  of  Corn  at  this  Time  :  with  Some 
Observations  on  the  Bounty.  By  the  author  of  the  Farmers  Letters  to  the  People 
cf  England,  London,  2d  ed.,  1770,  p.  21. 

4  Ibid.,  p.  28.  The  same  ideas  are  expressed  by  Young  in  other  works.  So  in 
The  Farmer's  Letters  to  the  People  of  England,  London,  1767,  pp.  27-32,  where 
he  quotes  approvingly  the  tract  mentioned  in  the  next  note.  So  also  in  his 
Political  Arithmetic,  containing  Observations  on  the  Present  State  of  Great  Britain 
and  the  Principles  of  her  Policy  in  the  Encouragement  of  Agriculture,  London, 
1774,  where  he  quotes  Houghton's  maxim  that  it  is  a  good  thing  "to  encourage 
the  people  to  a  high  living."  Young  comments  on  this  by  saying:  "The  idea 
of  encouraging  the  people  to  live  high,  is  a  very  bold,  but  I  believe  a  just  one." 
—  Ibid.,  pp.  no,  in. 


Those  who  discuss  the  General  Excise          37 

work  of  Temple,  who  wrote  shortly  before  Adam  Smith.  A 
riot  of  the  workingmen  in  London,  due  to  a  combination 
of  high  prices  of  food  and  a  lack  of  work,  took  place  in 
1765.  This  led  our  author  to  publish  a  tract,  in  which  he 
attempted  to  prove  that  high  prices  were  beneficial  to  the 
laborers  in  that  it  stimulated  their  industry.1  Five  years 
later  this  tract  was  rewritten  and  published  as  a  portly  vol- 
ume. In  it  he  advances  "the  paradox  that  taxes  tend  to 
lower  the  price  of  labour,"  and  states  as  a  familiar  truth  that 
"  when  provisions  are  cheap,  labour  is  always  relatively  dear." 
The  three  self-evident  principles  on  which  the  whole  work 
rests  are  summarized  as  follows :  "  First,  that  mankind,  in 
general,  are  naturally  inclined  to  ease  and  indolence,  and 
that  nothing  but  absolute  necessity  will  enforce  labour  and 
industry.  Secondly,  that  our  poor,  in  general,  work  only  for 
the  bare  necessities  of  life,  or  for  the  means  of  a  low  debauch ; 
which,  when  obtained,  they  cease  to  labour  till  roused  again 
by  necessity.  Thirdly,  that  it  is  best  for  themselves,  as  well 
as  for  society,  that  they  should  be  constantly  employed."  2 

Temple  argues  that  as  laborers  are  far  more  anxious  to 
work  when  provisions  are  very  dear,  the  augmented  supply 
of  labor  at  such  times  brings  down  the  rate  of  wages.  "  A 
general  industry  is  immediately  created;  workmen  croud 
about  the  houses  of  master-manufacturers,  begging  for 
work,  almost  at  any  rate ;  and  they  work  five  or  six  days 

1  The  title  of  this  tract  clearly  explains  its  purpose :   Considerations  on  Taxes, 
as  they  are  supposed  to  affect  the  Price  of  Labour  in  our  Manufactures :  also,  some 
Reflections  on  the  General  Behaviour  and  Disposition  of  the  Manufacturing  Popu- 
lace of  this  Kingdom ;    showing,  by  Arguments  drawn  from  Experience,  that 
nothing  but  Necessity  will  enforce  Labour ;   and  that  no  State  ever  did,  or  ever 
can  make  any  considerable  Figure  in  Trade,  where  the  Necessaries  of  Life  are  at 
a  low  Price.     London,   1765,  esp.  pp.  29-31.     Cunningham,  Growth  of  English 
Industry  and  Commerce  in  Modern  Times,  p.  560,  ascribes  it  to  Temple.    This 
William  Temple  was  originally  a  clothier  of  Trowbridge,  and  must  not  be  con- 
founded with  Sir  William  Temple,  who  entertained  much  the  same  views,  but 
who  wrote  in  the  preceding  century.     See  above,  p.  33. 

2  An  Essay  on  Trade  and  Commerce  :   Containing  Observations  on  Taxes,  as 
they  are  supposed  to  affect  the  Price  of  Labour  in  our  Manufactories :  together  with 
.some  interesting  Reflections  on  the  Importance  of  our  Trade  to  America.     By  the 
author  of  Considerations  on  Taxes.     London,  1770. 


38  Shifting  and  Incidence  of  Taxation 

in  the  week  instead  of  three  or  four.  Labour  being  a  kind  of 
commodity,  the  quantity  then  offered  tends  to  the  lowering 
its  price;  and  would  do  so,  unless  art  or  violence  inter- 
vened. Thus  far  the  paradox  is  explained  by  experience; 
and  thus  far  it  is  proved,  that  dearness  of  provisions  tends 
to  lower  the  price  of  labour  in  manufactories."1  Temple 
then  proceeds  to  prove  the  other  side  of  the  same  proposi- 
tion, that  low  prices  of  food  lead  to  high  wages  and  dear 
work.  The  experience  of  Holland,  as  usual,  furnishes  him 
with  his  strongest  illustrations.  He  does  not,  indeed,  go  so 
far  as  to  recommend  any  further  increase  of  taxes  on  the 
laborer.2  But  he  is  at  considerable  pains  to  point  out  that 
the  taxes  thus  far  levied  on  the  necessaries  of  life,  whether 
in  the  shape  of  excises  or  of  impost  duties,  have  exerted 
none  but  a  good  influence  on  the  laborers  in  particular  and 
on  the  community  in  general.3 

While  the  fullest  exposition  of  this  doctrine  is  found  in  the 
book  just  mentioned,  the  strongest  and  most  aphoristic  ex- 
pression of  the  idea  is  contained  in  another  work  of  William 
Temple,4  with  an  extract  from  which  our  series  of  quotations 
may  fitly  close.  Temple  contends  that  "the  only  way  to  make 
the  poor  temperate  and  industrious,  is  to  lay  them  under  a 
necessity  of  labouring  all  the  time  they  can  spare  from  meals 
and  sleep,  in  order  to  procure  the  common  necessaries  of 
life."5  And  after  adverting  to  the  experience  of  Holland,6 

1  An  Essay  on  Trade  and  Commerce,  p.  16. 

2  Ibid.,  pp.  282-286. 

8  "  Of  what  infinite  consequence  then  is  it,"  he  exclaims  in  another  place, 
"  that  some  method  should  be  found  out  to  enforce  labour,  and  to  procure  habits 
of  sobriety  and  industry  among  the  manufacturing  populace."  —  Ibid.,  p.  31. 
Cf.  also  pp.  22  etseq.  of  the  original  tract  of  1765. 

*  A  Vindication  of  Commerce  and  the  Arts,  proving  that  they  are  the  Source 
of  the  Greatness,  Power,  Riches  and  Populousness  of  a  State.  By  I.  B.,  M.D. 
[William  Temple].  London,  1758.  The  tract  has  been  reprinted  in  Lord  Over- 
stone's  Select  Collection  of  Scarce  and  Valuable  Tracts  on  Commerce.  London, 
1859. 

6  Overstone's  Select  Collection,  p.  534. 

6  "  Wages  in  Holland  are  low  in  proportion  to  the  price  of  necessaries,  every- 
thing being  excessively  taxed ;  the  people  from  hence  are  exceedingly  industri- 
ous."—  Ibid.,  p.  532. 


Those  who  discuss  the  General  Excise         39 

he  concludes  that  the  best  way  is  "  to  raise  a  fund  by  a  tax 
on  necessaries  in  a  time  of  plenty." J 

In  the  face  of  the  virtual  unanimity  of  opinion  of  this 
considerable  number  of  authors,  it  would  seem  difficult  for 
the  contrary  view  to  make  any  converts.  Nevertheless, 
although  it  was  not  at  first  a  popular  doctrine  among  economic 
writers,  the  theory  that  low  wages  are  not  necessarily  a 
benefit  to  a  country,  and  that  taxes  are  not  needed  to  reduce 
the  cost  of  labor,  gradually  made  headway  in  scientific  and 
commercial  circles. 

Perhaps  the  earliest  writer  to  deny  the  theory  that  low 
wages  are  good  for  a  country  was  Josiah  Child.  In  a  con- 
troversy with  Manley  he  takes  exception  to  the  statement 
that  "  it  is  the  Dearness  of  Wages  that  spoils  the  English 
Trade."  Child  lays  down  the  principle  that  "wherever 
Wages  are  high  universally  thro'out  the  whole  World  it  is 
an  infallible  evidence  of  the  Riches  of  that  Country :  and 
wherever  Wages  for  Labour  runs  low,  it  is  a  proof  of  the 
Poverty  of  that  Place." 2  The  attempt  to  lower  wages,  he 
continues,  can  have  only  injurious  results,  and  leads  to  an 
emigration  of  the  people  to  countries  where  higher  wages 
are  paid.3  "  It  is  true,"  says  Child,  "  our  Great  Grandfath- 
ers did  exercise  such  a  Policy  of  endeavoring  to  retrench  the 
price  of  Labour  by  a  Law  (although  they  never  could  affect 
it) ;  we  are  since,  with  the  rest  of  the  Trading  World,  grown 
Wiser  in  this  matter,  and  I  hope  shall  so  continue."  4  At  the 
same  time,  Child  does  not  seem  to  have  abandoned  the  old 
theory  that  high  prices  of  food  are  good  for  the  workman. 
In  another  passage  he  discusses  the  influence  of  dear  food 

1  Overstone's  Select  Collection,  p.  516. 

2  A  Discourse  about  Trade,  wherein  the  Reduction  of  Interest  of  Money  to  4!. 
per  Centum  is  Recommended,  etc.,  etc.      Never  before  printed.      [By  Josiah 
Child.]     London,  1690,  Preface,  pp.  u,  12.    The  second  edition,  published  in 
1694,  like  all  subsequent  editions,  is  entitled  A  New  Discourse  of  Trade.     For 
Manley 's  views,  see  above,  p.  31. 

8  "  If  we  retrench  by  Law  the  Labor  of  the  People,  we  drive  them  from  us  to 
other  Countries  which  give  better  Rates."  —  Ibid. 
*  Ibid.,  p.  13. 


40  Shifting  and  Incidence  of  Taxation 

on  industry  very  much  in  the  style  of  the  older  writers.1  He 
even  goes  so  far  as  to  speak  about  excises  as  conducing  to 
thrift.2  So  that  Child  can  scarcely  be  considered  an  oppo- 
nent of  the  older  theory  so  far  as  concerns  its  application 
to  finance. 

The  clearest  of  the  early  writers  to  prove  the  economy  of 
high  wages  was  John  Gary,  whose  views  on  another  point 
have  already  been  mentioned.3  Gary  puts  the  problem  as 
follows :  "  Whether  the  Price  of  Labour  discourages  our 
Manufactures  or  hinders  Improvements  in  our  Product  ?  " 
He  solves  the  problem  by  stating  "that  both  our  Product 
and  Manufactures  may  be  carried  on  to  advantage  without 
running  down  the  labour  of  the  Poor."  He  then  proceeds 
to  state  his  argument  under  two  heads.  First,  as  regards 
the  productions  of  the  soil,  says  Gary,  it  should  be  remem- 
bered that  nominal  wages  must  vary  with  the  price  of  food.4 
Therefore  a  reduction  of  wages  implies  a  lowering  of  prices ; 

1  "  The  Poor  live  better  in  the  dearest  Countries  for  Provisions,  than  in  the 
cheapest,  and  better  in  a  dear  year  than  in  a  cheap,  (especially  in  relation  to  the 
Publique  Good),  for  that  in  a  cheap  year  they  will  not  work  two  days  in  a  week; 
their  humour  being  such,  that  they  will  not  provide  for  a  hard  time  ;  but  just 
work  so  much  and  no  more,  as  may  maintain  them  in  that  mean  condition  to 
which  they  have  been  accustomed."     This  passage  was  first  printed  in  Child's 
earlier  work :  Brief  Observations  concerning  Trade  and  Interest  of  Money.     By 
J.  C.     London,  1668,  p.  II.     It  is  reproduced  in  the  Discourse  about  Trade,  on 
p.  19  of  the  portion  entitled  "A  Discourse  concerning  Trade."     It  also  appears 
in  the  later  editions. 

2  "The  Abatement  of  Interest  conjoynt  with  Excises  upon  our  home  consump- 
tion are  two  of  the  most  comprehensive  and  effectual  Sumptuary  Laws  that  ever 
were  established,  and  most  necessitating  and  engaging  any  People  to  thriftiness, 
the  high  Road  to  Riches."  —  A  Discourse  about  Trade,  p.  27  of  the  part  entitled 
"  Trade  and  Interest  of  Money  considered."     It  was  probably  these  passages  that 
caused  Arthur  Young  in  his  Farmer's  Letters,  p.  29,  to  mention  Child  as  having 
"  concurred  in  the  same  observations"  that  he  made.     See  above,  p.  36. 

3  See  above,  p.  26. 

4  "  As  for  the  first,  our  Product,  I  am  of  opinion  that  the  running  down  the 
Labour  of  the  Poor  is  no  advantage  to  it,  nor  is  it  to  the  Interest  of  England  to  do 
it,  nor  can  the  People  of  England  live  on  such  low  Wages  as  they  do  in  other 
Countrys;    for  we  must  consider  that  Wages  must   bear  a  Rate  in  all  Nations 
according  to  the  prices  of  Provisions."  —  An  Essay  on  the  State  of  England,  etc. 
By  John  Cary.     Bristol,  1695,  p.  J44- 


Those  who  discuss  the  General  Excise          41 

and  lower  prices  involve  a  diminution  in  the  value  of  land. 
"  You  cannot  fall  Wages  unless  you  fall  Product,  and  if  you 
fall  Product,  you  must  necessarily  fall  Land." *  Secondly, 
as  regards  manufactured  articles,  he  continues,  people  have 
only  to  look  at  them,  to  see  that  prices  have  been  continually 
falling  without  any  corresponding  decrease  in  wages.2  "  But 
then  the  question  will  be,  how  this  is  done  ?  I  answer,  It 
proceeds  from  the  Ingenuity  of  the  Manufacturer,  and  the 
Improvements  he  makes  in  his  ways  of  working."  He  then 
proceeds  to  show  how  machinery  effects  this  result,3  and  con- 
cludes that  "  New  Projections  are  every  day  set  on  foot  to 
render  the  making  of  our  Manufactures  easie,  which  are 
made  Cheap  by  the  Heads  of  the  Manufacturers,  not  by  fall- 
ing the  Price  of  poor  Peoples  Labour."  4 

Although  this  most  suggestive  passage  shows  how  old  are 
some  of  the  most  modern  views  on  industry,  for  some  time 
comparatively  little  application  of  them  was  made  to  prob- 
lems of  taxation.  We  do,  indeed,  find  in  the  ensuing  decades 
some  incidental  allusions  to  the  impolicy  of  taxing  wages. 
Thus,  one  interesting  writer  states  that  "the  labour  of  the 
meaner  sort  of  people  is  of  too  great  consequence  to  a  trad- 
ing Nation  to  be  any  way  slighted  or  disregarded."5  A 

1  An  Essay  on  the  State  of  England,  p.  145. 

2  "  Observation,  or  Experience  of  what  hath  been  done,  we  have  and  daily  do 
see  that  it  is  so;  the  Refiners  of  Sugar  lately  sold  for  Six  Pence  per  Pound  what 
yielded  twenty  Years  since  Twelve  Pence;  the  Distillers  sell  their  Spirits  for  one 
third  part  of  what  they  formerly  did;   Glass  Bottles,  Silk-Stockings  and  other 
Manufactures,  (too  many  to  be  enumerated)  are  sold  for  half  the  Prices  they  were 
a  few  Years  since,  without  falling  the  Labour  of  the  Poor."  —  Ibid. 

3  "  All  which  save  the  Labour  of  many  Hands,  so  the  Wages  of  those  imployed 
need  not  be  lessened."  —  Ibid.,  p.  146. 

*  Ibid.,  p.  147. 

5  This  pamphleteer  was  opposed  to  the  employment  of  foreigners.  After 
showing  the  advantages  of  employing  home  workmen,  he  proceeds :  "  and  since 
the  very  meanest  under-workers  in  Wool  contribute  in  some  measure  towards  the 
support  of  the  State,  and  the  movement  of  the  great  wheels  of  Trade;  it  seems  a 
peculiar  hardship  upon  them,  as  well  as  inconsistency  in  the  management  of  affairs 
here,  first  to  put  them  under  a  necessity  of  raising  their  Wages,  by  taxing  many 
of  the  necessaries  of  life;  and  afterwards  to  make  the  dearness  of  their  labour, 
occasion'd  by  those  Taxes,  the  very  ground  and  reason  of  discouraging,  or  declin- 


42  Shifting  and  Incidence  of  Taxation 

few  years  later,  Nugent  states  emphatically :  "  one  thing  is 
certain,  that  no  good  can  be  produced  by  taxes  upon  com- 
modities. They  may  starve  the  industrious,  but  they  never 
will  induce  the  idle  and  extravagant  to  labour  and  to  save."  l 
In  the  second  quarter  of  the  eighteenth  century,  however,  a 
more  vigorous  attack  was  made  on  the  premises  as  well  as 
vpn  the  conclusions  of  the  partisans  of  the  excise. 

Among  the  most  important  of  these  writers  was  Vander- 
lint.  At  first  sight,  he  seems  to  maintain  that  prosperity 
can  be  attained  only  through  a  reduction  of  wages.2  Yet, 
notwithstanding  the  fact  that  he  demands  an  abolition  of 
taxes  on  necessaries  for  this  reason,3  Vanderlint  is  in  reality 
a  strenuous  advocate  of  higher  remuneration  for  the  workman. 
The  lowering  of  wages  at  which  he  aims  is  merely  a  seeming 
reduction  due  to  the  abolition  of  taxes  and  to  an  increase  in 
the  money  supply.  Prices,  he  thinks,  will  fall  still  more,4  which 
of  course  means  a  relative  rise  in  wages.5  Vanderlint  is,  in 
fact,  a  strong  believer  in  the  theory  that  a  high  standard  of 
life  for  the  laboring  population  is  much  to  be  desired.6  He 

ing  to  make  use  of  English  hands,  and  of  employing  foreign  (as  in  this  view  we 
must  account  Irish)  hands  in  their  stead."  —  The  Grasiers*  Complaint  and  Peti- 
tion for  Redress  :  or  the  Necessity  of  Restraining  Irish  Wool  and  Yarn  ;  and  of 
Raising  and  Supporting  the  Price  of  Wool  of  the  Growth  of  Great  Britain  con- 
sider}d.  By  a  Lincolnshire  Grasier.  London,  1726,  pp.  44,  45. 

1  Considerations  upon  a  Reduction  of  the  Land  Tax.     [By  Robert  Nugent.] 
London,  1749,  p.  17. 

2  "  Reducing  the  present  Rates  of  Labour  appears  to  me  absolutely  necessary 
to  increase  .  .  .  Trade."  —  Preface  to  Money  answers  all  Things  :  or,  an  Essay 
to  make  Money  sufficiently  Plentiful  amongst  all  Ranks  of  People,  and  Increase 
our  Foreign  and  Domestick  Trade,  Fill  the  Empty  Houses  -with  Inhabitants,  En- 
courage the  Marriage  State,  Lessen  the  Number  of  Hawkers  and  Pedlars,  and  in 
a  great  measure,  prevent  giving  long  Credit,  and  making  bad  Debts  in  Trade. 
By  Jacob  Vanderlint.     London,  1 734. 

8  "  I  do  verily  believe  that  taking  the  Taxes  intirely  off  the  Things  the  work- 
ing People  consume  is  so  absolutely  needful,  that  Labour  can  hardly  be  reduced 
without  it."  —  Ibid.,  p.  159. 

*  This  is  shown,  among  other  things,  by  the  title  of  the  work.  It  was  this 
grievous  error  about  money  which  served  to  consign  the  book  to  oblivion,  not- 
withstanding its  many  good  points.  6  Ibid.,  pp.  34,  69,  and  esp.  86,  87. 

6  Among  the  reasons  advanced  is  that  higher  wages  will  conduce  to  better 
work :  "  The  working  People  can  and  will  do  a  great  deal  more  Work  than  they 


Those  who  discuss  the  General  Excise         43 

is  even  the  first  writer  to  advance  a  doctrine  that  has  only 
recently  come  into  prominence  —  the  doctrine  that  as  the 
laborers  form  the  mass  of  consumers,  the  large  consumption 
which  gives  the  impetus  to  profitable  production  and  general 
prosperity  itself  depends  on  the  purchasing  power  of  the 
consumers,  —  that  is,  on  the  high  wages  and  the  high 
standard  of  life  among  the  laborers.1 

Twenty  years  later,  Sir  John  Nickolls  went  to  the  root  of 
the  matter  when  he  stated,2  "We  have  flattered  ourselves 
too  much,  if  we  have  believed  that  on  augmenting  the  taxes 
upon  the  consumption,  we  should  bring  our  workmen  to  the 
sobriety,  or  frugality  of  a  Frenchman,  who  lives,  or  rather 
starves,  upon  roots,  chestnuts,  bread  and  water;  or  to  the 
thriftiness  of  a  Dutchman,  who  contents  himself  with  dried 
fish,  and  butter-milk.  When  our  workmen  can  no  longer 
raise  the  price  of  their  work  to  their  mind,  there  'still  remain 
two  great  refuges  to  them  from  labor,  the  Parish  and 
Robbing."  3 

The  most  popular  exponent  of  the  newer  doctrine  was 
Postlethwayt.  In  a  passage  which  is  practically  a  plagiarism 
of  the  one  just  quoted  from  Nickolls,  Postlethwayt  objects  to 
taxes  on  the  mass  of  consumers.4  It  is  true,  indeed,  he  says, 

do,  if  they  were  sufficiently  encouraged.  For  I  take  it  for  a  Maxim,  that  the 
People  of  no  Class  will  ever  want  Industry,  if  they  don't  want  Encouragement." 
—  Ibid.,  pp.  122,  123. 

1  He  objects  to  any  scheme  for  "  making  the  Poor  fare  harder,  or  consume  less 
than  their  reasonable  Wants  in  that  Station  require;  for  they,  being  the  Bulk  of 
Mankind,  would  in  this*  Case  affect  the  Consumption  of  Things  in  general  so 
mightily,  that  there  would  be  a  Want  of  Trade  and  Business  amongst  the  other 
Part  of  the  People." — Ibid.,  p.  69,  note.     (In  reality  this  should  be  page  6l,  as 
the  headings  of  pp.  65-72  are  printed  twice  by  mistake.)     Cf.  p.  81. 

2  Remarks  on  the  Advantages  and  Disadvantages  of  France  and  of  Great 
Britain  with  Respect  to  Commerce.     1754.     See  above,  p.  29,  note  I. 

8  Ibid.,  pp.  261,  162. 

4  "  Augmenting  Taxes  on  our  Consumption,  has  not  "brought  our  Workmen  to 
the  Sobriety  or  Frugality  of  a  Frenchman  or  to  the  Thriftiness  of  a  Dutchman : 
and  when  our  Workmen  cannot  raise  the  Price  of  their  Labor  and  Workmanship 
to  the  Degree  they  would,  they  have  recourse  to  the  Parish  or  Robbery."  — 
Great  Britain's  True  System.  By  Malachy  Postlethwayt,  Esq.  London,  1757, 
p.  1 60.  For  the  full  title,  see  below,  p.  62. 


44  Shifting  and  Incidence  of  Taxation 

that  wages  are  fixed  by  the  price  of  food. l  But  the  increase 
of  wages  due  to  a  tax  will  increase,  not  decrease,  the  cost  of 
production,  and  will  put  the  country  at  a  disadvantage  in 
competition  with  foreigners.  The  result  will  be  the  ruin  of 
the  whole  community,  of  course  including  the  laboring  class. 
An  artificial  rise  in  wages  through  taxation,  in  his  opinion, 
gives  "  superaddition  of  value "  to  the  country's  products, 
which  can  only  be  harmful  to  all  concerned.2  But,  as  he 
points  out  in  another  work,  high  wages  and  leisure  for  the 
workman,  when  created  by  natural  causes,  are  the  surest 
guarantee  of  good  work  and  bountiful  production. 3  Massie, 
another  popular  writer  of  the  same  period,  expressed  a 
similar  conclusion  very  forcibly  in  the  title  of  a  work  de- 
signed to  prove  that  the  excise  would  be  a  "  pinchbelly  tax  " 
to  the  workingmen.4 

The  point  could  not  have  been  put  more  plainly  than  by 
Nathaniel  Forster,  who  pours  out  the  vial  of  his  wrath  upon 
those  persons  who  have  "  the  hardiness  to  assert  that  high 
taxes  upon  the  necessaries  of  life  contribute  in  their  conse- 
quences even  to  the  more  plentiful  production  of  them  and 
that  the  poor  will  be  industrious  only  in  the  degree  that  they 
are  necessitous."5  Forster  terms  this  "a  doctrine  which 

1  "  Where  Food  and  Cloathing,  the  Necessaries  for  a  Day,  are  purchased  for  a 
little,  there  Wages  will  be  low,  or  Labor  Cheap."  —  Great  Britain's  True  Sys- 
tem, p.  144. 

2  "  When  the  general  Price  of  Labor  soars  above  its  natural  Standard,  and 
thereby  an  artificial  Value  is  superadded  to  our  Produce  and  Manufacture,  beyond 
which  our  Rivals  do,  we  must  lose  our  Dominion  in  Trade  ;  and  our  Ruin  then 
cannot  be  far  distant :  and  this  Superaddition  of  Value  to  our  Commodities  arises 
solely  from  the  Modus  wherein  our  Taxes  are  laid  and  raised."  —  Ibid.,  p.  158. 

3  The  Universal  Dictionary  of  Trade  and  Commerce.     London,  1751,  vol.  i, 
Preliminary  Discourse. 

4  Reasons  humbly  offered  against  laying  any  further  tax  upon  Malt  or  Beer, 
shelving  that  such  a  tax  would  not  only  cause  great  Losses  to  the  Landholders  of 
England,  but  be  prejudicial  to  several  branches  of  our  Manufactures,  and  prove 
a  pinchbelly  Tax  to  some  hundred  thousand  Families  of  Labouring  People.     By 
J.  Massie.     London,  1760.     For  other  views  of  Massie,  see  below,  pp.  63,  64. 

5  An  Enquiry  into  the  Causes  of  the  Present  High.  Price  of  Provisions.     In 
Two  Parts:  I  Of  the  General  Causes  of  this  Evil;   II  Of  the  Causes  of  it  in 
some  particular  Instances.     [By  Nathaniel  Forster.]     London,  1767,  p.  49. 


Those  who  discuss  the  General  Excise          45 

avarice  in  private  life  has  greedily  seized,  and  has  not  failed 
to  improve  to  its  own  purposes."  "  But  it  is  a  doctrine,"  he 
adds,  "  as  false,  as  it  is  inhuman." a  He  proceeds  to  show 
that  it  is  necessarily  false ;  for,  says  he,  if  harder  work  means 
lower  wages,  taxes  will  lead  not  to  industry,  but  to  the 
reverse.2 

This  marked  the  turning-point  in  the  controversy.  Some 
authors,  like  Tucker,  were  now  convinced  that  their  previous 
views  had  been  erroneous.  Tucker,  in  fact,  wrote  a  special 
tract  designed  to  prove  that  countries  where  high  wages  are 
paid  can  successfully  compete  with  those  in  which  the  rate  of 
wages  is  low. 3  Higher  wages,  says  he,  do  not  necessarily 
imply  greater  cost  of  production,  for  the  larger  remuneration 
of  the  laborer  is  compensated  by  his  greater  skill.  "  Is  it 
not  much  cheaper,"  asks  Tucker,  "to  give  2s.  6d.  a  Day  in 
the  rich  Country  to  the  nimble  and  adroit  Artist,  than  it  is  to 
give  only  6d.  in  the  poor  one,  to  the  tedious,  aukward  Bun- 
gler."4 In  the  same  way  Schomberg  expresses  the  newer 
theory  in  the  statement  that  "labour  in  a  country  of  low 
wages  is  comparatively  dearer,  than  where  wages  are  high."  5 

Thus  we  see  that  in  the  third  quarter  of  the  eighteenth 
century  the  belief  that  taxes  on  labor  would  benefit  the  com- 
munity by  acting  as  a  spur  to  industry  was  seriously  shaken. 
When  this  doubt  was  reinforced  by  the  more  general  theory 
already  discussed,6  that  taxes  on  the  poor  are  a  hardship  for 

1  An  Enquiry  into  the  Causes  of  the  Present  High  Price  of  Provisions,  p.  55. 

2  "  If  a  man  sees  that  the  harder  he  labours,  the  higher  he  shall  be  taxed,  or  if 
he  finds  in  private  life  that  his  wages  are  lowered  in  proportion  to  his  industry,  is 
it  in  nature  that  either  of  these  circumstances  should  tend  to  increase  his  industry? 
They  must  always  have  a  contrary  effect,  and  will  necessarily  crush  and  extinguish 
it."  _  Ibid.,  p.  58. 

3  Four  Tracts  on  Political  and  Commercial  Subjects.     By  Josiah  Tucker,  D.D. 
2d  ed.,  1774.     Tract  I:  "Whether  a  rich  Country  can  stand  a  Competition  with 
a  poor  Country  (of  equal  natural  Advantages)  in  raising  of  Provisions  and  Cheap- 
ness of  Manufactures." 

4  Ibid.,  p.  34. 

6  Historical  and  Political  Remarks  upon  the  Tariff  of  the  Commercial  Treaty  : 
With  Preliminary  Observations.  [By  A.  C.  Schomberg.]  London,  1787,  pp.  156 
et  seq. 

6  See  above,  pp.  26-28. 


46  Shifting  and  Incidence  of  Taxation 

them,  whatever  be  the  result  on  the  community  at  large,  the 
day  of  complete  confidence  in  the  excise  had  gone  by.  The 
point  to  be  emphasized  is  that  the  advocates,  as  well  as 
the  opponents  of  the  excise,1  agreed  as  to  their  theory  of  in- 
cidence; and  that  some  defended,  while  others  objected  to, 
this  system  of  the  taxation  of  necessaries  precisely  because,  in 
their  opinion,  it  rested  on  the  poor.  Their  general  doctrine 
of  incidence,  in  short,  was  that  the  excise  rests  on  the  mass  of 
the  consumers. 

3.    The  Excise  is  shifted  to  the  Landowners 

As  compared  with  the  writers  discussed  in  the  previous 
section,  there  were  few  who  maintained  that  the  incidence  of 
the  excise  as  such  is  on  the  landowner.  There  were,  indeed, 
some  influential  thinkers  who  held  that  all  taxes  are  shifted 
to  the  land.2  But  the  special  doctrine  which  singled  out  ex- 
cises as  the  particular  taxes  that  finally  rest  on  land  met  with 
comparatively  little  support. 

Probably  the  first  writer  to  advance  this  theory  was  an 
anonymous  pamphleteer  of  the  last  decade  of  the  seventeenth 
century.  He  is  concerned  especially  with  "  a  Home-Excise 
upon  things  eatable  and  drinkable,  and  several  other  Merchan- 
dizes which  are  sold  in  the  Market."  3  The  ordinary  state- 
ment that  an  excise,  which  he  calls  "  a  troublesome  and  slavish 
sort  of  Tax,"  4  rests  on  the  consumer  is  declared  by  him  to 
be  an  error.  For  example,  the  more  the  farmer  has  to  pay 
for  the  commodities  of  his  own  consumption,  says  he,  the  less 
he  will  be  able  to  pay  as  rent.5  The  farmers  and  the  land- 

1  With  the  exception  of  Vanderlint,  whose  attitude  is  explained  below,  p.  76. 

2  See  below,  pp.  71  et  seq. 

8  Some  Considerations  about  the  most  proper  Way  of  Raising  Money  in  the 
Present  Conjuncture.  London,  1692,  p.  15. 

4  Ibid.,  p.  27. 

5  "  The  common  argument  for  an  Excise,  That  it  will  spare  our  Lands ;  is 
grounded  upon  a  false  Supposition :   This  is  not  a  sparing  our  Lands,  but  a  charg- 
ing them  for  ever  with  double  what  is  needful.    The  dearer  the  Farmer  pays  for 
his  Commodities,  the  less  Rent  he  will  pay;   and  the  less  his  Product  yields  him 


Those  who  discuss  the  General  Excise          47 

owners,  moreover,  will  be  the  only  ones  to  suffer.  For  if  a 
tax  be  imposed  on  some  of  the  farmer's  own  products,  as  for 
instance  on  malt,  he  will  have  to  bear  the  greater  part  or  the 
whole  of  the  tax,  because  otherwise  there  would  be  a  con- 
siderable falling  off  in  the  demand  and  a  consequent  diminu- 
tion of  price.  The  brewers  will  be  the  real  gainers,  for  they 
will  get  their  raw  material  cheap  and  will  sell  the  finished 
product  at  the  old  price.1  The  author,  it  thus  appears,  is  not 
very  clear  in  explaining  why  a  tax  would  cause  the  price  of 
manufactured  articles  to  rise,  but  would  have  no  such  effect 
on  agricultural  products. 

Another  writer  of  the  same  period  makes  the  statement 
that  "A  General  Excise  upon  Home  Commodities  is  a  real 
Land  Tax,  and  will  have  the  same  Influence  upon  the  Value 
of  Lands  and  Rents,  as  that  we  call  a  Land  Tax,  or  Monthly 
Assessment  hath." 2  He  is  aware  of  the  general  principle 
that  prices  fall  with  the  increase  of  supply ; 3  but  he  thinks 
that  the  supply  of  commodities  in  England  is  so  great  that 
the  market  is  at  the  mercy  of  the  purchaser.4  A  tax  on  corn- 
clear,  accordingly  he  must  value  his  Farm.  The  more  (for  example)  is  laid  on  Lead, 
the  less  will  Woods  and  Oar  yield;  and  so  of  other  Commodities."  — Ibid.,  p.  28. 

1  "  It  is  evident,  this  Tax  will  fall  very  hard  everywhere  upon  the  poor  Farmers; 
and  those  who  are  best  able  to  pay  it,  will  be  most  spared :  For  example,  if  an 
Excise  should  be  laid  upon  Malt,  where  will  the  Burden  lye?    The  price  of  it 
will  certainly  sink  in  the  Countrey,  for  want  of  Consumption,  by  reason  of  the  new 
Imposition.    The  Brewers  in  great  Cities  and  Towns  .  .  .  will  be  the  only  Gain- 
ers, since  they  will  buy  their  Malt  cheap,  and  sell  their  drink  as  dear  or  dearer 
than  before.    And  the  poor  Farmer  will  bear  the  loss."  —  Ibid.,  p.  29. 

2  An  Essay  upon  Taxes,  calculated  for  the  Present  Juncture  of  Affairs  in  Eng- 
land.    London,  1693,  P-  Ia    The  COPV  *n  the  possession  of  the  present  writer  is 
ascribed  by  its  former  possessor,  but  probably  without  reason,  to  Sir  William 
Temple. 

3  "  If  the  Necessity  of  the  Buyer  be  greater  than  the  Seller,  the  Market  will  rise; 
but  if  that  of  the  Seller  be  greater  than  the  Buyer,  the  Price  of  Commodities  must 
fall;  and  any  Duty  laid  upon  Commodities  will  lye  upon  either  accordingly."  — 
Ibid.,  pp.  12-12. 

4  "  But  as  to  the  present  Case  in  England,  I  think  that  there  is  nothing  more 
apparent,  than  the  Plenty  of  Home  Commodities,  and  the  want  of  People  to  con- 
sume them  .  .  . ;  the  consequence  of  which  necessarily  will  be,  That  whatever 
Duty  is  impos'd  upon  the  Commodity,  the   Buyer  will  have  it  so  much  the 
cheaper."  —  It>id.,p.  12. 


48  Shifting  and  Incidence  of  Taxation 

modities,  therefore,  must  fall  on  the  producer  or  seller ;  and, 
since  everything  is  a  product  of  the  land,  a  tax  on  products  is 
a  tax  on  land.1 

At  the  time  of  the  controversy  over  Walpole's  excise 
scheme,  we  find  the  same  views  in  a  number  of  pamphlets 
designed  to  show  the  injurious  consequences  of  the  tax.  Of 
these,  the  ablest  are  by  Pulteney 2  and  D' Anvers.3  Few  of 
these  writers  distinguish,  in  their  discussions  of  the  incidence 
of  the  tax,  between  the  landlord  and  the  farmer  who  rents 
the  land.  One  writer,  however,  goes  into  the  question  a  little 
more  fully.  He  maintains  that  just  as  a  land  tax  levied 
on  the  occupier  or  farmer  is  shifted  to  the  owner  of  the 
land,4  so  an  excise  tax,  —  for  instance  on  salt,  —  even  though 
it  reach  the  farmer,  is  ultimately  paid  by  the  landlord  through 
a  fall  in  rent.5  Even  assuming,  however,  that  the  excise  is 
shifted  to  the  poor  consumer,  he  will  not  suffer  in  the  long 
run.  For  if  the  excise  takes  the  place  of  the  land  tax,  the 
landlord  will  have  more  to  spend  "  in  Hospitality  "  as  well  as 

1  "  A  general  Excise  and  a  Land  Tax  differ  not  essentially,  since  both  are  a  Duty 
upon  the  same  Commodities,  which  are  the  Product  of  Land."  —  An  Essay  upon 
Taxes,  etc.,  p.  u.     As  the  object  of  the  author  is  to  diminish  the  burden  upon 
land,  he  therefore  favors  a  general  property  tax.     See  below,  p.  68. 

2  The  Case  of  the  Revival  of  the  Salt  Duty  fully  stated  and  considered  with 
some  Remarks  on  the  Present  State  of  affairs,  in  answer  to  a  late  Pamphlet  intitled 
a  Letter  to  a  Freeholder  on  the  Reduction  of  the  Land  Tax  to  one  Shilling  in  the 
Pound.    In  a  Letter  from  a  Member  of  the  House  to  a  Gentleman  in  the  Country. 
[By  William  Pulteney.]    London,  1732.    The  author  quotes  Locke's  statement 
that  all  taxes  fall  on  land,  but  adds :  "  I  could  cite  a  great  deal  more  to  the  same 
Purpose  .  .  .  ;  but  I  chuse  to  decline  it,  lest  I  should  be  represented  as  an  Advo- 
cate for  Land  Taxes;  whereas  my  great  Desire  is  that  our  Taxes  in  general  may 
belessen'd." — p.  49.     Cf.  his  views  as  to  the  effect  of  taxes  on  necessaries  and 
wages,  p.  54. 

3  An  Argument  against  Excises,  in  several  Essays  lately  published  in  the 
Craftsman,  and  now  collected  together.     By  Caleb  D'Anvers  of  Gray's  Inn,  Esq. 
London,  2d  ed.,  1733.     See  especially  pp.  67  and  76. 

4  "  Tho  these  Charges  are  paid  immediately  by  the  occupier,  yet  they  fall  ulti- 
mately on  the  Landlord;  who  is  obliged  on  these  accounts  to  let  his  Land  so 
much  the  cheaper." —  The  Case  of  the  Salt-Duty  and  Land- Tax  offered  to  the 
Consideration  of  every  Freeholder.     London,  1732,  p.  10. 

5  "  It  is  a  Tax  that  does  not  affect  the  Farmer,  for  he  hires  his  Land  the  cheaper 
of  his  Landlord."  —  Ibid.,  p.  II. 


Those  who  discuss  the  General  Excise          49 

in  the  "  Improvement  of  his  Estates  " ;  and  the  laborer  will 
be  the  person  to  reap  the  benefit.1  The  honesty  of  our 
author's  statements,  as  well  as  his  logic,  is,  however,  open  to 
criticism ;  for  while  the  other  writers  object  to  the  excises 
because  they  affect  the  landed  interest,  he  is  strongly  in 
favor  of  the  scheme,  while  at  the  same  time  he  is  strenuously 
opposed  to  any  increase  in  the  land  tax.2 

4.   The  Excise  rests  on  the  Traders 

Our  survey  of  the  different  views  held  as  to  the  excise 
would  not  be  complete  without  mentioning  those  writers 
who  maintained  that  the  tax  was  not  shifted  at  all,  but  rested 
on  the  merchant  who  paid  it  first.  This  doctrine  was  put 
forward  with  especial  emphasis  at  the  time  of  Walpole's 
excise  scheme  by  its  opponents,  who  were  desirous  of  mar- 
shalling every  possible  argument  against  the  plan. 

One  of  the  most  vehement  pamphleteers,  for  instance, 
objects  to  the  "bondage  merchants  suffer,"  after  exposing 
themselves  to  the  dangers  of  the  sea,  and  after  paying  import 
duties  "  by  not  being  permitted  to  deliver  their  Goods  after 
Sale  without  paying  an  imposed  Penalty  by  Way  of  Excise."  3 

1  If  the  dealer  pays  the  duty,  he  shifts  it  to  the  consumer.     "  Who  then  is  the 
Sufferer.     If  anybody,  it  is  the  Labourer :  but  it  will  be  found  that  he  has  no  reason 
to  complain."  — Ibid.,  p.  13. 

2  The  land  tax  he  calls  a  "partial  tax,"  for  "  every  one  knows  that  Personal 
Estates  are  seldom  or  never  charged :  for  Money  is  of  a  transitory  Nature;  it  shifts 
so  often  from  Place  to  Place,  and  Person  to  Person,  that  'tis  impossible  to  know 
where,  or  in  whose  hands  to  charge  it."  —  Ibid.,  p.  9.    Furthermore,  it  is  in  his 
opinion  very  unequal  in  different  parts  of  the  Kingdom.     Cf.  p.  16.     He  proposes 
accordingly  a  freeing  of  the  land,  and  thinks  that  "it  might  be  done  by  laying 
a  Tax,  either  on  one  or  two  Species  of  Commodities  in  common  use,  or  on  some 
favourite  vanities  of  Mankind."  —  Ibid.,  p.  1 7. 

8  "As  if,"  he  adds,  "the  Trade  of  a  Merchant  should  now  be  looked  upon  as 
guilty  of  some  high  Crimination,  and  therefore  fitting  to  be  manacled  and  awed 
with  the  Bonds  of  slavish  Restraint;  ...  as  if  those  Goods  which  the  Merchant 
hath  purchased  in  foreign  Parts,  were  not  as  properly  his  as  the  Gentlemens 
Houses  and  Lands."  —  Excise  anatomized.  Declaring  that  unequal  Imposition  of 
Excise  to  be  the  only  Cause  of  the  Ruin  of  Trade,  the  universal  Impoverishment, 
and  destructive  to  the  Liberties  of  the  whole  Nation.  By  Z.  G.,  A  Well-wisher 
of  the  common  good.  London,  1733,  p.  5. 
E 


50  Shifting  and  Incidence  of  Taxation 

The  dealer,  he  contends,  is  thus  made  to  suffer  all  manner  of 
delay  and  inconvenience,  and  often  loses  the  chance  of  a 
sale.  He  discusses,  in  picturesque  language,  nine  objections 
to  the  excise,1  and  finds  that  it  errs  most  grievously  "  by  the 
disproportionableness  and  inequality  of  its  Imposition,  by 
laying  the  greatest  Weight  and  Burthen  on  the  Back  of 
Trade,  thereby  utterly  disheartening  the  most  ingenious 
and  industrious  Party."  2  He  is  not  weary  of  speaking  of 
the  tax  as  "  that  detestable  and  so  often  damned  Imposition 
of  Excise."3  The  vehemence  of  the  writer's  language  in 
describing  the  nine  inequalities  of  the  excise  is  paralleled  in 
English  literature  only  by  the  author  (who  signs  himself 
Thrasybulus)  of  a  much  later  work  which  paints  in  lurid 
colors  the  thirty-three  defects  of  the  excise.4 

1  He  speaks  of  the  excisemen  as  those  "  who  like  ravenous  wolves  (using  the 
Law  of  Excise  for  their  Sheep's  Cloathing)  will  not  satisfy  their  insatiable  Appe- 
tites with  less  than  the  greater  Part  (of  the  merchants'  property)."  —  Excise 
anatomized,  p.  6.     He  speaks  of  other  officials  as  "  those  deformed  Monsters  of 
this  Age,  cloak'd  with  the  Name  of  Farmers  of  the  Excise,  whose  insolent  Vile- 
ness,  and  exhausting  Oppressions,  transcends  all  former  Ages."  —  Ibid.,  p.  9. 

2  Ibid.,  p.  4.     "The  Merchant  and  Trader,"  he  adds  elsewhere,  "stands  in  as 
much  Fear  of  the  Excise-Man,  as  the  Welsh  Traveller  did  of  his  Host,  when 
being  at  Supper,  and  finding  amongst  his  Eggs,  one  with  a  chick  in  it,  hastily 
supp'd  it  up,  for  fear,  lest  his  Host  seeing  it,  might  make  him  pay  a  Groat  for 
it."  —  Ibid.,  p.  9. 

*  Ibid.,  p.  19.  As  its  consequence  "all  our  former  flourishing  Tranquility  is 
become  a  Skeleton  of  Dry  Bones."  —  p.  n. 

4  Cf.  Six  Letters  on  Excise,  and  particularly  on  the  Act  passed  in  1789,  for 
subjecting  the  Manufactures  of  and  Dealers  in  Tobacco  and  Snuff  to  the  Laws  of 
Excise.  London,  1790.  From  the  ninety-two  pages  of  invective  the  following 
may  be  quoted  as  samples,  although  no  attempt  is  here  made  to  reproduce  the 
reasoning.  The  proposition  for  the  excise  is  "  dangerous,  oppressive  and  uncon- 
stitutional," "alarming,"  "subversive  of  freedom,"  "fraught  with  impolicy," 
"inconsistent  with  political  wisdom  and  equity,"  "pregnant  with  danger," 
"  replete  with  blindest  folly  and  indiscretion,"  "  of  essential  injury  to  piety  and 
religion,"  "perpetually  inimical  to  happiness,"  "a  glaring  violation  of  sacred 
principles,"  "impervious  in  its  spirit  and  troublesome  in  its  operation,"  "con- 
spicuous for  inhumanity,"  "  a  source  of  great  mortification  and  irretrievable 
disadvantage,"  "  an  unparalleled  oppression,"  "  unjustly  rigorous  and  meanly 
ensnaring,"  "  in  an  eminent  degree  ridiculous  and  contemptible,"  "  totally  in- 
admissible," "precipitate  and  unnecessary,"  "utterly  inexpedient,"  "fundament- 
ally improper,"  "in  no  measure  adequate  to  the  end  proposed,"  "rash  and 


Those  who  discuss  the  General  Excise          51 

Another  controversialist,  D'Anvers,  tried  to  cover  two 
positions.  He  did  not  deny  that  excises  were  shifted  to  the 
consumer,  but  he  contended  that  they  hurt  the  trader  as  well. 
"  Will  this  Gentleman  pretend,"  he  said,  referring  to  an  oppo- 
nent, "that  Taxes  bring  no  Burthen,  no  Difficulty  or  Loss 
upon  the  Trader,  by  taking  the  Money  immediately  out  of  his 
Pocket,  which  He  could  otherwise  employ  to  great  Advantage, 
and  giving  a  Check  to  the  Circulation  of  his  Trade."  x  D'An- 
vers laid  down  his  general  conclusion  in  the  words  "  Taxes  on 
Trade  have  already  deprived  us  of  some  valuable  Branches 
of  it."  2 

It  may  be  queried,  however,  whether  D'Anvers  really 
meant  anything  more  than  that  taxes  on  trade  are  frequently 
injurious  to  the  general  interests  of  commerce  —  an  opinion, 
common  enough  in  the  writings  of  the  seventeenth  century, 
which  can  be  found  well  expressed  in  the  celebrated  work  of 
Lewes  Roberts.3  But  the  more  precise  question  as  to  the 
exact  incidence  of  taxes  on  trade  was  more  fully  discussed  in 
connection  with  the  duties  laid  on  colonial  sugar.  It  may  be 
interesting  to  mention  a  few  of  these  writers,  all  of  whom 
maintain  that  the  tax  rests  on  the  seller  or  sugar-planter. 

The  clear-headed  author  of  one  seventeenth-century  tract 
declares  the  assertion  that  the  new  sugar  duty  will  be  paid  by 
the  buyer  "  a  meer  Mockery."  For,  "  if  an  Impost  be  laid 

impolitic,"  "  essentially  hostile  to  the  fair  trade,"  and  "  permanently  disadvanta- 
geous to  the  revenue."    See  esp.  pp.  1-22. 

1  He  adds :  "  It  is  the  Plenty,  or  Scarcity  of  any  Commodity,  in  Proportion 
to  its  Vent  and  Demand,  which  must  always  rule  in  these  Cases,  and  by  which 
the  Trader  will  make  more  or  less  Profit  in  his  Dealings." —  The  Second  Part  of 
an  Argument  against  Excises;  in  answer  to  the  Objections  of  several  Writers. 
By  Caleb  D'Anvers  of  Gray's  Inn,  Esq.     London,  1733,  p.  19. 

2  Ibid.,  p.  20.     See  also  p.  41. 

3  "  When  the  customes  upon  Merchants  goods  is  small,  it  easily  draweth  all 
nations  to  trade  with  them;  and  contrariwise,  where  great  impositions  are  laid 
upon  Merchants  goods  the  traffike  of  the  place,  will  be  seen  soone  to  decay,  to 
the  prejudice  of  that  place  and  Kingdom."  —  The  Treasure  of  Traffike,  or  a  Dis- 
course of  Forraigne  Trade.      Wherein  is  shelved  the  benefit  and  commoditie  aris- 
ing- to  a  Common-  Wealth  or  Kingdome,  by  the  skilfull  Merchant,  and  by  a  well 
ordered  Commerce  and  regular  Traffike.    By  Lewes  Roberts,  Merchant  and  Cap- 
taine  of  the  City  of  London.     London,  1641,  p.  61.         « 


52  Shifting  and  Incidence  of  Taxation 

upon  the  Sugar,  whoever  pays  it  the  Planter  is  sure  to  bear 
it.  What  avails  it  though  the  Buyer  pays  the  Duty,  if  the 
Seller  must  presently  allow  it  in  the  Price."  1  Where  the  price 
of  the  article  is  practically  fixed,  he  adds,  as  in  the  case  of 
beer,  the  brewer  can  easily  add  the  tax  to  the  price.  But 
where  "  the  Price  is  uncertain,  and  a  Bargain  is  to  be  driven, 
and  a  Duty  yet  to  be  paid,"  the  matter  is  very  different.  For 
competition  will  compel  the  seller  to  take  less.2  The  general 
principle,  he  thinks,  can  be  put  as  follows  :  "  'Tis  not  Imposi- 
tions, but  Plenty  and  Scarcity,  that  rules  the  Market.  And  it 
is  found  by  constant  Experience,  that  where  an  Impost  is  laid 
upon  a  Commodity  in  demand,  there  the  Buyer  may  be 
brought  to  bear  some  part  of  it.  But  if  the  Market  be  glutted, 
and  the  Commodity  be  a  Drug  (as  Ours  is,  and  for  ever  will 
be) ;  in  this  case  the  Buyer  will  bear  no  part  of  the  Duty,  but 
the  Seller  must  pay  it  all."  3 

In  the  fourth  decade  of  the  eighteenth  century,  the  project 
of  a  new  duty  on  sugar  led  to  a  reconsideration  of  the  ques- 
tion. A  number  of  writers  now  contended  that  the  sugar 
duty  would  be  borne  by  the  seller.  To  the  extent  that  the 
seller  happened  to  be  the  planter,  the  theory  would  be  equiv- 
alent to  the  one  discussed  in  the  last  section  —  the  theory, 
namely,  that  the  landowner  would  bear  the  burden.  For  in 
this  case  the  sugar  planter  would  be  at  once  the  landowner  and 
the  trader.  Thus  one  pamphlet,  written  to  prove  that  the 
duty  rests  on  the  sugar-planter,  argues  that  the  important  con- 
sideration is  the  possible  restriction  of  the  supply.  "  Every 

1  The  Groans  of  the  Plantations  :  or,  a  true  Account  of  their  Grievous  and 
Extreme  Sufferings  by  the  Heavy  Impositions  upon  Sugar,  and  other  Hardships, 
etc.     London,  1689  (reprinted  1698),  p.  9. 

2  "  'Tis  not  the  Appointment  of  Law,  but  the  Agreement  of  the  Parties  that 
must  decide  the  question.     In  our  Case  the  Buyer  will  naturally  be  at  this  lock : 
If  you  clear  the  Duty,  I  will  give  you  so  much  for  a  Hundred  of  your  White 
Sugar;  if  I  must  pay  it  you  must  have  seven  Shillings  less.     Which  is  as  broad 
as  long. 

"The  Buyer,  they  say,  must  pay  the  Duty,  but  sure  the  Seller  may  pay  it  if  he 
please.  And  he  will  please  to  pay  it,  rather  then  not  sell  his  Sugar.  If  He  will 
not,  there  are  enow  beside  that  will."  —  Ibid.,  p.  9. 

8  Ibid.,  p.  io. 


Those  who  discuss  the  General  Excise  53 

one  admits,"  says  the  author,  "that  Quantity  and  Vent  give 
a  Price  to  any  Commodity ;  it  is  therefore  to  be  considered 
in  what  Cases  the  Quantity  can  be  commanded  or  ascer- 
tained, in  proportion  to  the  Vent,  and  in  what  Cases  it  can- 
not ;  for  where  it  can,  the  Duties  will  lie  on  the  Consumer ; 
but  where  it  cannot,  it  will  evidently  lie  on  the  Producer  or 
Maker  as  often  as  the  Quantity  exceeds  the  Vent."  1  He 
then  proceeds  to  show  by  specific  figures  that  in  the  case  of 
sugar  the  latter  is  true.2  Another  writer  on  the  same  subject 
lays  down  the  general  principle  in  similar  language ; 3  and 
John  Ashley,  who  comes  to  a  like  conclusion,  states  that 
"  Experience  hath  shewn,  that  all  Duties  laid  upon  Sugar 
affects  the  Producer  more  than  the  Consumer."4  One  of 
the  last  of  the  pamphleteers  on  this  topic  discusses  the  state- 
ment that  the  taxes  will  be  shifted  to  the  consumer,  but 
urges  in  opposition  that  the  price  of  sugar  fluctuates  accord- 
ing to  the  quantity  imported  into  the  marts  of  Europe,  with- 
out reference  to  taxes  imposed  at  any  particular  place.5 
Since  it  is  far  more  difficult  in  the  case  of  sugar  than  in  that 
of  other  commodities  to  apportion  the  supply  to  the  demand, 

1  The  Axe  (once  more}  Laid  to  the  Root  of  the   Tree.     Published  for  the  uni- 
versal Benefit  of  Mankind  and  dedicated  to  the  Landholders  of  the  British  Domin- 
ions.    By  a  Friend  to  Truth  and  the  Christian  Religion.     London,  1743,  pp.  1-2 
of  A  Supplement  on  Taxes  in  General  on  British  Sugar. 

2  Ibid.,  pp.  9  and  21  of  the  Supplement. 

8  "  The  Seller  of  a  necessary  Commodity  can  oblige  the  Buyer  to  pay  it's 
Taxes,  in  case  the  Quantity  at  Market  is  only  equal  to  the  Vent  or  Demand. 
On  the  contrary,  when  the  Quantity  at  Market  much  exceeds  the  Vent  or 
Demand,  this  is  absolutely  out  of  the  Seller's  Power;  for  the  Plenty  will  influ- 
ence, and  keep  down  the  Price,  in  spite  of  his  utmost  Endeavours."  —  Considera- 
tions against  laying  any  New  Duty  upon  Sugar,  wherein  is  particularly  shewn, 
That  a  New  Imposition  will  be  ruinous  to  the  Sugar  Colonies.  London,  1744, 
p.  7. 

4  The  Second  Part  of  Memoirs  and  Considerations  concerning  the  Trade  and 
Revenues  of  the  British  Colonies  in  America.  By  John  Ashley,  Esq.  London, 

J743»  P-  79- 

6  "  Thus  it  appears  that  the  Price  of  Sugar  fluctuates  according  to  the  Quan- 
tity imported  into  Europe,  without  any  regard  to  any  advanced  Duties."  —  The 
State  of  the  Sugar  Trade  ;  shewing  the  Dangerous  Consequences  that  must  attend 
any  additional  Duty  thereon.  London,  1747,  p.  4. 


54  Shifting  and  Incidence  of  Taxation 

he  thinks  the  net  result  will  be  that  the  taxes  will  finally  fall 
on  the  planter.1 

Reviewing  the  authors  treated  in  this  chapter,  we  see  that 
the  discussion  of  the  excise  called  forth  almost  every  conceiv- 
able theory  as  to  its  incidence.  Some  thought  that  the  tax 
was  not  shifted  at  all,  some  maintained  that  it  was  shifted  to 
the  landowner,  some  believed  that  it  was  shifted  to  the  con- 
sumer, and  some  contended  that  it  was  again  shifted  by  these 
to  the  employers  of  labor.  These  views  were  advanced  with 
all  degrees  of  confidence — but,  with  few  exceptions,  with  little 
grasp  of  fundamental  economic  principles.  Among  the  asser- 
tions and  proofs,  however,  we  found  here  and  there  some 
interesting  premonitions  of  modern  theories.  Although  we 
cannot  speak  of  any  unanimous  or  authoritative  doctrine,  the 
better  opinion,  as  we  have  seen,  and  the  one  which  gradually 
gained  an  ever-increasing  number  of  adherents,  was  that 
the  excise  tends  to  be  shifted  to  the  consumer,  and  that  it 
augments  the  burdens  resting  on  the  mass  of  the  laborers. 
In  this  way  scientific  opinion  gradually  came  to  harmonize 
with  the  popular  view. 

1  "  Nor  can  the  Quantity  be  proportioned  or  ascertain'd  according  to  the 
Demand,  as  in  the  Case  of  many  other  Commodities,  from  the  great  Charge  in 
settling  a  Sugar-Plantation,  the  long  growth  of  the  Sugar  Cane,  the  uncertain 
Produce,  and  many  other  Reasons."  His  conclusion  thus  is  that  "  the  Price  of 
Sugar  is  govern'd  by  the  Quantity  and  that  the  Duties  lie  on  the  Planters."  — 
The  State  of  the  Sugar  Trade,  pp.  4,  6.  Cf.  p.  1 6.  A  similar  argument  may  be 
found  in  Reasons,  grounded  on  Facts,  shewing  that  a  new  Duty  on  Sugar  must 
fall  on  the  Planter,  and  that  a  new  Duty  will  not  certainly  encrease  the  Revenue. 
London,  1748. 


CHAPTER  II 
THOSE  WHO  FAVOR  A  SINGLE  TAX  ON  LUXURIES 

As  we  have  already  seen,  confidence  in  the  general  excise 
—  in  the  sense  of  a  tax  on  the  producer  or  dealer,  —  which 
was  deemed  by  the  great  mass  of  writers  to  be  an  indirect 
tax  on  the  consumer,  gradually  weakened  during  the  eigh- 
teenth century.  Partly  because  it  was  no  longer  deemed 
equitable  that  the  poorer  consumers  should  bear  the  burden, 
partly  because  it  was  supposed  that  these  taxes  were  prejudi- 
cial4 to  trade,  the  idea  of  an  indirect  tax  on  consumption  in 
general  was  now  replaced  by  that  of  a  direct  tax  on  certain 
particular  kinds  of  expenditure.  Instead  of  levying  a  tax  in 
first  instance  on  the  producer  or  dealer,  it  was  now  proposed 
to  lay  one  directly  on  the  consumer ;  and  instead  of  making 
the  general  consumer  bear  the  burden,  it  was  planned  to  tax 
only  the  purchaser  of  certain  luxuries.  In  short,  in  lieu  of 
an  indirect  tax  on  necessaries,  we  now  meet  with  the  scheme 
of  a  direct  tax  on  luxuries. 

The  earliest  inkling  of  such  a  plan  is  probably  to  be  found 
in  a  seventeenth-century  work  of  Chamberlayne.  This  writer 
gives  all  the  details  of  a  scheme  which  he  sums  up  in  the  prop- 
osition that  "upon  all  such  Commodities  as  occasion  either 
Excess  or  Luxury,  Wantonness,  Idleness,  Pride  or  Corruption 
of  Manners  there  may  be  laid  a  large  and  extraordinary  Im- 
post." l  But  from  his  reference  to  "  the  practice  of  neigh- 
bour Nations  "  it  is  not  quite  certain  whether  Chamberlayne 
is  here  speaking  of  a  direct  or  an  indirect  tax  on  luxuries. 

1  Englands  Wants  or  several  Proposals  probably  Beneficial  for  England, 
humbly  offered  to  the  Consideration  of  all  good  Patriots  in  both  Houses  of  Parlia- 
ment. By  a  true  Lover  of  his  Country.  [Edward  Chamberlayne.]  London, 
1667,  p.  4. 

55 


56  Shifting  and  Incidence  of  Taxation 

This  doubt,  however,  does  not  exist  in  the  case  of  another 
writer,  toward  the  end  of  the  century,  who  was  careful  to 
recommend  taxes  on  commodities  "  payable  by  the  Buyer  " 
or  "  Consumptioner." l  That  he  refers  to  luxuries  appears 
clearly  from  his  statement  that,  according  to  the  scheme  as 
elaborated  in  the  monograph,  "all  Persons  Tax  themselves 
according  to  such  Degrees  as  their  Extravagancies  shall 
prompt  to  exceed  the  Decent  and  Necessary  Uses  of  them." 
The  author  discusses  the  objection  that,  as  the  purchaser 
is  apt  to  be  overreached  anyway,  the  tax  ought  to  be  paid 
by  the  c<  seller  who  gets  prophet." 2  His  reply  is  threefold  : 
first,  if  the  goods  are  not  sold,  the  dealer  pays  nothing; 
second,  the  seller  is  under  no  temptation  to  increase  the 
price  by  more  than  the  tax;  third,  there  is  less  chance  of 
evasion.3  The  tax,  he  concludes,  rests  where  it  is  imposed, 
and  cannot  be  shifted. 

During  the  seventeenth  century,  these  isolated  proposals 
met  with  little  support.  It  was  not  until  shortly  before  the 
middle  of  the  eighteenth  century  that  the  doctrine  was  put  for- 
ward in  so  authoritative  a  manner  as  to  command  attention. 

The  plan  of  a  single  tax  on  luxuries  was  unfolded  in 
an  anonymous  work,4  the  authorship  of  which  is  doubtful 

1  To  the  Honourable  the  Knights,  Citizens,  and  Burgesses  of  the  House  of  Com- 
mons in  Parliament  assembled,  Proposals  most  humbly  offered  for  Raising  (in 
all  Likelyhood)  upwards  of  Five  Millions  of  Money,  -without  Charging  the  Poor,  or 
Burthening  the  Rich,  by  such  Ways  and  Means,  that  (for  the  greatest  part  therof} 
the  Payers  will  voluntarily  Tax  themselves.     [By  J.  M.]     London,  1696,  p.  i. 

2  "  It  may  probably  be  objected,  that  'twill  be  hard  on  the  Buyer,  who  parts 
with  his  Money  for  anything  herein  named,  to  pay  the  Tax,  when  perhaps  he  may 
be  out-reach' d  in  the  price;  therefore  more  reasonable  to  be  paid  by  the  seller 
who  gets  prophet."  —  Ibid.,  pp.  4,  5. 

3  "  The   Answer  hereunto  is  Obvious,  if  Consider'd,  that  first,  none  will  be 
Burthen'd  with  Taxes  for  any  Commoditie,  that  lies  on  hand  dead  and  unsold : 
Secondly  the  seller  is  debarr'd  of  any  Just  pretensions  for  Inhancing  the  price 
thereof,  beyond  the  usual  Value  .  .  . :  and  Lastly,  the  Tax  will  more  certainly  be 
pay'd,  for  no  seller  will  put  himself  at  the  Mercy  of  any  Informing  Buyer,  since  it 
comes  not  out  of  his,  but  the  Buyers  Pocket."  —  Ibid.,  p.  5. 

4  An  Essay  on  the  Causes  of  the  Decline  of  the  Foreign  Trade,  consequently  of 
the  Value  of  Lands  of  Britain  and  on  the  Means  to  Restore  Both.     Begun  in  the 
Year  1739.     London,  1744. 


Those  who  favor  a  Single  Tax  on  Luxuries     57 

even  to  this  day.  By  some  it  is  ascribed  to  Richardson, 
by  others  to  Decker,  with  the  probabilities  in  favor  of  the 
former.1  The  author  was  careful  to  emphasize  his  opposi- 
tion to  general  excise  duties  "  because  of  the  great  preju- 
dice they  do  to  trade."  His  plan  was  to  lay  "  One  Tax 
on  the  Consumers  of  Luxuries  and  take  off  all  our  other 
Taxes,  Excises,  and  Customs."2  He  gave  a  catalogue  of  the 
few  articles  he  wished  to  have  taxed.3  It  goes  without  say- 
ing that,  in  his  opinion,  the  tax  would  remain  where  it 
was  put.  "The  greatest  benefit  of  All,"  he  added,  "is  that 
this  Proposal  hath  not  those  extending,  pernicious,  Trade- 

1  For  the  grounds  on  which  the  authorship  is  ascribed  to  Decker  rather  than 
to  Richardson,  see  the  article  in  Palgrave's  Dictionary  of  Political  Economy,  i, 
p.  519.     To  the  authorities  quoted  there  may  be  added  the  statements  in  Tucker, 
A  Brief  Essay  on  Trade,  1750,  pp.  129-149;  in  Nickolls,  Remarks  on  the  Advan- 
tages and  Disadvantages,  etc.   (quoted  a  few  notes  below),  pp.  264  and  268; 
and  in  Arthur  Young,  Political  Arithmetic,  p.   244,  in  all  of  which  it  is  also 
ascribed  to  Decker.    Professor  Conner,  the  author  of  the  article  in  the  Dictionary, 
states  that  the  edition  of  1749  bears  Decker's  name  on  the  title-page.     It  is  to  be 
remarked,  however,  that  the  later  (Edinburgh)  edition  of  1756  (a  copy  of  which, 
together  with  one  of  the  original  edition,  is  in  the  possession  of  the  present  writer) 
is  anonymous.     The  strongest  argument  against  its  ascription  to  Decker  is  that 
Decker  is  known  to  be  the  author  of  another  tract  of  almost  the  same  date  advo- 
cating a  single  tax  on  houses  (see  below,  pp.  60,  6i),and  that,  in  many  works 
of  the  fifties  and  sixties,  when  Decker's  scheme  is  mentioned  at  all,  the  reference 
is  to  the  house  tax.     See  especially  below,  pp.  62,  63.      It  seems  improbable 
that  two  such  different  projects  should  have  been  advanced  by  the  same  writer, 
without  making  in  the  later  work  any  reference  at  all  to  the  plan  of  the  former. 
Professor  Cunningham  is  also  of  the  opinion  that  Decker  cannot  be  the  author. 
See  7"he  Growth  of  English  Industry  and  Commerce  in  Modern    Times,  1892, 
p.  409,  note  3.     At  the  same  time,  it  is  to  be  noted  that  Arthur  Young  in  his 
Political  Arithmetic  ascribes  both  works  to  Decker,  and  speaks  (p.  214)  of  the 
tax  on  houses  as  Decker's  "  favorite  scheme."     Yet  it  was  the  earlier  one,  or  at 
all  events  the  one  first  published. 

2  An  Essay,  etc.,  p.  44. 

8  Adam  Smith,  who  refers  to  his  "  well  known  proposal "  to  tax  "  all  com- 
modities "  (  Wealth  of  Nations,  book  v,  chap,  ii;  Rogers'  ed.  ii,  p.  474),  as  well  as 
Bastable  (Public  Finance,  2d  ed.,  1895,  p.  318),  who  speaks  of  his  "  plan  of  a 
license  for  the  consumption  of  commodities,"  are  not  quite  exact.  For  the  plan 
was  not  to  tax  "  commodities  "  or  "  all  commodities,"  but  only  certain  "  articles  of 
luxury."  One  of  the  chief  recommendations  of  the  scheme  to  the  author  is  that 
it  will  act  as  a  "  Sumptuary-Law  to  keep  all  People  in  their  proper  Stations." 
—  An  Essay,  etc.,  p.  51. 


58  Shifting  and  Incidence  of  Taxation 

destroying  Consequences  of  our  present  Taxes;  for  it  will 
not  raise  the  Value  of  any  one  Commodity,  but  rather,  by 
checking  Luxury,  the  Bane  of  Virtue  and  Industry,  we  shall 
become  a  rich  and  flourishing  People." 1 

An  enthusiastic  advocate  of  this  scheme  for  a  single  tax  is 
to  be  found  in  Josiah  Tucker,  who  outlined  the  plan  in  an 
appendix  to  one  of  his  important  works.2  Tucker's  chief 
reason  for  the  proposal  is  contained  in  his  general  principle 
that  "it  is  just  and  reasonable  each  Person  should  pay  in 
proportion  to  what  he  Uses  of  any  Commodity:  Now  the 
most  probable  Grounds  we  can  go  upon  (for  the  affair  will 
not  admit  of  Certainty  and  Demonstration)  is,  That  Persons 
in  general  live  in  Proportion  to  the  Figure  they  make."3 
Hence  to  tax  a  man  according  to  his  expenditures  for  luxu- 
ries constitutes  the  most  equitable  method  of  taxation.  An- 
other advocate  of  the  scheme  was  Nickolls,4  whose  reasons 
for  opposition  to  the  general  excise  have  already  been 
mentioned.5  After  giving  an  interesting  statement  of  his 
general  philosophy  of  taxation,6  he  concludes  that  "a  free 
tax  bearing  solely  upon  the  different  articles  of  luxury,  and 
consumption  (those  of  absolute  necessity  excepted)  seems 
the  properest  to  fulfill  these  intentions."  He  approves  the 

1  An  Essay,  etc.,  p.  52. 

2  A  Brief  Essay  on  the  Advantages  and  Disadvantages  which  respectively 
attend  France  and  Great  Britain  with  Regard  to  Trade.     The   appendix  is 
entitled  An  Appendix   containing  a   Plan  for  raising  one  only    Tax  on  the 
Consumers  of  Luxuries.     [By  Josiah  Tucker.]     London,  2d  ed.,  1750.    See  esp. 
pp.  123-135  and  145-166. 

3  Ibid.,  p.  153. 

4  Remarks  on  the  Advantages  and  Disadvantages  of  France  and  Great  Britain^ 
etc.     [By  Sir  John  Nickolls.]     London,  1754. 

5  Above,  p.  29,  where  the  exact  title  is  given. 

6  "  The  consideration  of  the  different  taxes  which  constitute  the  Revenue  of  the 
State,  and  of  the  inconveniences  of  each,  naturally  leads  a  Patriot  to  the  desire  of 
finding  the  means  of  taxing  all  the  articles  which  could,  and  ought  to  be  made 
contribute,  in  the  justest,  easiest,  equalest  manner,  to  the  Public  charge;  that  is 
to  say,  of  taxing  every  subject  in  proportion  to  the  advantage  he  draws  from 
Society :  insomuch,  that  with  respect  to  him  who  has  no  property,  so  far  from 
depriving  him  of  the  hopes  of  acquiring  any,  the  influence  of  the  taxes  should  be 
no  more  than  a  gentle  spur  to  his  industry,  and  that  it  should  fall  reasonably,  and 


Those  who  favor  a  Single  Tax  on  Luxuries     59 

scheme  as  developed  by  its  original  author,1  and  favors  it 
especially  because  the  amount  spent  on  each  class  of  luxuries 
may  be  regarded  as  a  rough  index  of  the  income  enjoyed 
and  disposable  for  such  a  purpose.2  Finally,  among  the 
other  writers  who  favored  this  plan,  which  was  soon 
adopted,  —  not,  indeed,  as  a  single  tax,  but  as  a  supplement 
to  existing  taxes,  —  may  be  mentioned  Forster,  the  deter- 
mined opponent  of  all  taxes  on  wages,  and  to  a  certain  ex- 
tent Postlethwayt.3  With  the  incorporation  of  certain  taxes 
on  luxuries  into  the  general  scheme  of  the  English  revenue 
system,  the  discussion  of  the  proposition  soon  ceased. 

not  arbitrarily  upon  those  who  have  some  property,  that  is  to  say,  in  proportion  to 
the  real  and  personal  estates  they  enjoy."  —  Ibid.,  pp.  268,  269. 

1  Nickolls  ascribes  it  to  Decker. 

2  "  He  takes  each  of  these  articles  for  the  sign  of  a  fortune  of  such  a  certain 
revenue,  upon  which  he  is  imposing  a  tax  of  three  pence  for  every  pound  ster- 
ling." —  Ibid.,  p.  269. 

8  An  Enquiry  into  the  Causes  of  the  Present  High  Prices  of  Provisions.  [By 
Nathaniel  Forster.]  London,  1767.  Part  I,  chap,  iii,  "Of  Taxes,"  pp.  50-53. 
For  the  modified  advocacy  of  Postlethwayt,  see  below,  p.  62. 


CHAPTER   III 
THOSE  WHO  FAVOR  A  SINGLE  TAX  ON  HOUSES 

THE  revenue  reformers  of  the  eighteenth  century  were 
fond  of  schemes  for  a  single  tax.  Once  granted  that  taxes 
on  consumption  rest  on  the  consumer,  and  that  it  is  wise  to 
avoid  the  incidental  interference  with  trade  which  would 
result  from  taxes  levied  on  the  trader,  it  was  but  a  step 
further  to  contend  that  a  single  tax  on  luxuries,  which  at  all 
events  necessitates  a  scrutiny  into  the  luxurious  expenditures, 
might  be  improved  upon.  By  taking  some  one  criterion  of 
expenditure,  which  was  not  only  universal  but  patent  to  all, 
the  same  results  might  be  reached  with  much  less  difficulty. 
The  desired  criterion,  it  was  now  suggested,  was  the  build- 
ing occupied.  Instead  of  a  general  excise,  it  was  proposed 
to  lay  a  single  tax  on  houses. 

The  chief  advocate  of  this  scheme  was  Sir  Matthew 
Decker.1  He  starts  out  with  the  idea  of  a  tax  or  license 
duty  on  the  consumers  of  tea,  to  replace  the  tax  on  the  im- 
porters or  dealers.  But,  passing  by  this  as  a  matter  of 
minor  importance,  he  proceeds  to  make  the  suggestion  for  a 
"general  excise."  This,  he  is  careful  to  explain,  differs 
entirely  from  what  is  generally  associated  with  that  name. 
His  scheme,  so  he  tells  us,  means  only  "one  single  Excise- 
Duty,  and  that  upon  Houses."  2  He  discusses  its  character- 
istics at  great  length,  and  states  its  chief  merits  as  follows : 

1  Serious  Considerations  on  the  several  High  Duties  which  the  Nation  in  general 
(as  well  as  its  Trade  in  particular}  labours  under :  with  a  Proposal  for  prevent- 
ing the  Running  of  Goods,  discharging  the  Trader  from  any  Search,  and  raising 
all  the  Publick  Supplies  by  One  Single   Tax.     By  a  Well- Wisher  to  the  Good 
People  of  Great  Britain.     [Sir  Matthew  Decker.]     London,  1743. 

2  Ibid.,  p.  15. 

60 


Those  who  favor  a  Single  Tax  on  Houses      61 

"  All  Duties  being  abolished,  it  would  prevent  all  Manner  of 
Running  and  hinder  the  Ruin  of  many  Thousands  of  poor 
unhappy  Creatures,  which  have  been,  or  are  still  employed  in 
the  Smuggling  Trade  "  ;  furthermore,  "  it  would  set  the  Mer- 
chant and  Shopkeeper  free  from  a  Multitude  of  false  and 
vexatious,  or  frivolous  Informations,  which  may  now  be 
lodged  against  them  "  ;  and,  above  all,  it  would  enable  "  the 
Merchant  as  well  as  Shop  and  Warehouse-Keeper  to  trade 
with  Half  the  Stock,  and  make  his  Profit  the  same,  or  rather 
increase  it."  J 

Everywhere  we  find  the  emphasis  put  on  the  interests  of 
production  and  trade,  because  of  the  opinion  that,  in  the  long 
run,  these  interests  are  the  important  ones  to  be  considered. 
This  appears  clearly  from  his  views  as  to  taxes  on  the  work- 
ingmen.  Although  Decker,  indeed,  desires  to  exempt  the 
houses  "of  the  lowest  and  poorest  Sort  of  People,"  he  puts 
his  demand  on  the  express  ground  that  "  thereby  their  Labour 
might  become  so  much  the  cheaper."2  The  incidence  of 
taxes  on  necessaries,  therefore,  according  to  Decker,  is  really 
on  the  employer,  and  not  on  the  laborer.  His  general  idea 
of  favoring  production  and  trade  may  be  seen  also  from  the 
close  of  his  exposition,  where  he  expresses  the  hope  that  it 
may  be  said  of  England,  as  formerly  of  Tyre,  "that  their 
Merchants  are  Princes  and  their  Traffickers  the  Honourable 
of  the  Earth."  3 

Decker's  project  was  greeted  by  a  number  of  enthusiastic 
followers.  Most  of  these  preferred  the  single  tax  on  houses 
to  the  general  excise  on  the  ground  that  the  former  would 
bear  less  heavily  on  the  producer  and  the  trader,  since  lower 
taxes  on  necessaries  would  mean  lower  rates  of  wages.  Thus, 
the  author  of  an  anonymous  tract,  in  speaking  of  a  new  plan 
to  be  "  substituted  in  the  room  of  our  present  preposterous 


1  Ibid. ,  p.  23. 

2  "  And  the  Goods,"  he  adds,  "  which  are  the  Produce  of  their  Labour,  might, 
by  this  Means,  be  sold  at  as  low,  or  even  a  lower  Rate  than  can  be  afforded  by 
other  Nations." — Ibid.,  p.  16. 

8  Ibid.,  p.  32. 


62  Shifting  and  Incidence  of  Taxation 

Method  of  Taxing,"  said  that  "a  more  advantageous  Scheme, 
not  altogether  unlike  that  of  Sir  Matthew  Decker's  might 
be  proposed,  which  would  exempt  the  Laborious  from  every 
Tax ;  by  which  the  landed  Interest  and  all  the  useful  Mem- 
bers of  the  Community  would  be  considerable  Gainers." 1 
So  also  Postlethwayt  held  that  an  artificial  rise  of  wages 
through  taxes  was  injurious  to  the  laborer  as  well  as  to  the 
whole  community,  and  put  the  query  "Whether  the  Encrease 
of  Taxes  in  our  State  do  not  all  somehow  ultimately  termi- 
nate upon  our  Trade  and  Commerce."  2  To  avoid  this  result 
he  favored  "  One  moderate  and  equal  Tax  upon  Houses," 
or,  as  he  puts  it  in  another  place,  "some  one  general  tax, 
either  upon  houses  or  otherwise."  3  Postlethwayt,  it  will  be 
seen,  was  not  quite  sure  in  his  mind  as  to  the  advisability  of 
a  single  tax  on  houses ;  later  he  even  suggested  as  an  alterna- 
tive the  single  tax  on  luxuries.4  Another  writer,  Fauquier, 
with  whose  vigorous  opposition  to  the  excise  we  have  already 
become  acquainted,  also  approved  Decker's  scheme.  His 
argument  was  simple.  "  Since  the  Consumer  pays  the  whole 
of  the  Tax,  it  must  be  equal  to  him,  when  he  maturely  weighs 
it,  how  or  on  what  it  is  laid.  All  that  really  concerns  him, 
is  that  he  should  pay  as  little  as  the  Exigencies  of  the  State 
will  admit  of;  and  that  the  whole  of  what  he  does  pay 
should,  if  possible,  go  clear  of  all  Deductions  into  the  Ex- 
chequer, to  answer  the  Purposes  for  which  it  was  levied."  5 

1  The   Case  of  the  Five  Millions  fairly  stated  in  regard  to   Taxes,  Trade, 
Law,  Lawyers,  etc.    Addressed  to  the  Guardians  of  our  Liberty.     London,  1758, 
p.  17. 

2  Great  Britains  True  System  wherein  is  clearly  shewn,  That  an  Increase  of 
the  Public  Debt  and  Taxes  must,  in  a  few  Years,  prove  the  Ruin  of  the  Monied, 
the  Trading  and  the  Landed  Interests  etc.    Humbly  submitted  to  the  Consideration 
of  all  the  Great  Men,  In  and  Out  of  Power.     By  Malachy  Postlethwayt,  Esq. 
London,  1757,  p.  132. 

8  Ibid.,  pp.  130,  134. 

4  "  A  free  tax,  bearing  solely  upon  the  different  articles  of  Luxury  and  Con- 
sumption (those  of  absolute  Necessity  excepted)."  —  Ibid.,  p.  319.     See  above, 

P-59- 

6  An  Essay  on  Ways  and  Means,  etc.     By  F.  F.     London,  1756,  p.  22.     For 
the  full  title  of  the  work,  see  above,  p.  17,  note  7.     Fauquier  really  approved  of 


Those  who  favor  a  Single  Tax  on  Houses       63 

A  few  writers  accepted  the  principle  of  this  scheme,  while 
desiring  to  modify  it  by  substituting  windows  for  houses. 
The  earliest  advocate  of  this  single  tax  on  windows,  Horsley, 
advanced  his  scheme  immediately  after  Decker  had  pub- 
lished his  plan.1  Horsley,  it  appears,  cared  more  for  the 
"  singleness  "  of  the  tax  than  for  anything  else.  "  It  seems 
to  me  no  otherwise  material,"  he  tells  us,  "what  you  lay  the 
Duty  on,  so  it  be  a  single  Duty."2  The  same  idea  of  "con- 
solidating every  imposition  whatever,"  in  order  to  "fix  it 
altogether  on  windows,"  was  advanced  by  another  writer3 
a  few  decades  later,  when  all  single  tax  ideas  had  about 
gone  out  of  fashion. 

Decker's  project  for  a  single  tax  on  houses  soon  met  with 
determined  opponents.  Of  these,  the  most  prominent  was 
Massie.  In  his  earlier  work,  written  to  controvert  the  plan 
as  set  forth  by  Fauquier,4  Massie  disclosed  only  a  moderate 
opposition.5  But  in  the  following  year  he  turned  his  bat- 
teries in  full  force  against  Decker  himself.6  He  specifies 
all  kinds  of  objections  upon  which  it  is  not  necessary  here  to 
dilate,  farther  than  to  state  that  he  condemns  the  single  tax 

Decker's  scheme,  only  with  some  modifications.  See  An  Essay,  p.  26.  He  even 
suggested  a  capitation  tax  as  an  alternative.  —  Ibid.,  p.  32  ;  and  more  decidedly 
in  the  postscript  to  the  second  edition,  published  the  same  year. 

1  Serious   Considerations  on  the  High  Duties  examined :  addressed  to  Sir 
Matthew  Decker :    By  Mr.  Horsley.    London,  1744. 

2  Ibid.,  p.  32. 

8  Considerations  on  the  National  Debt  and  nett  Produce  of  the  Revenue  :  with  a 
Plan  for  consolidating  into  one  Rate  the  Land  and  all  other  Taxes,  by  which  More 
Money  will  be  raised;  Individuals  not  pay  half  the  present  Taxes;  Smuggling 
altogether  prevented ;  .  .  .  the  poor  exempted  from  every  Contribution,  etc.  By  a 
Merchant  of  London.  London,  1784.  See  esp.  p.  31. 

4  Observations  upon  Mr.  Fauquier's  Essay  on  Ways  and  Means  for  raising 
Money  to  support  the  present  War  without  increasing  the  Public  Debts,  etc. 
By  J.  M.  [Joseph  Massie].  London,  1756. 

6  He  objects  more  to  the  amount  to  be  raised,  than  to  the  manner  of  rais- 
ing it. 

6  The  Proposal,  commonly  called  Sir  Matthew  Decker's  Scheme  for  one  General 
Tax  upon  Houses,  laid  open  ;  and  shewed  to  be  a  deep  concerted  Project  to  traduce 
the  Wisdom  of  the  Legislature;  disquiet  the  Minds  of  the  People ;  and  ruin  the 
Trade  and  Manufacturies  of  Great  Britain.  [By  Joseph  Massie.]  London, 
'757- 


64  Shifting  and  Incidence  of  Taxation 

on  houses  as  really  "a  Proposal  to  raise  all  the  Public  Sup- 
plies by  one  General  Tax  upon  the  Commodities  and  Manu- 
factures of  Great  Britain."  So  far  as  the  incidence  of  the 
tax  is  concerned,  he  believes  that  it  will  be  shifted  to  the 
consumer ;  for,  "  whatever  Money  a  Farmer,  a  Tradesman,  or 
a  Merchant  pays  for  Taxes  is,  and  must  be  repaid  him  in  the 
Prices  of  the  Commodities  he  deals  in."1  He  favors  the 
existing  land  tax  because  it  finally  falls  on  the  landowner.2 
In  respect  to  the  incidence  of  the  other  taxes,  he  seems  to 
revert  to  the  old  theory  that  "  the  Taxes  of  this  Kingdom  are 
so  wisely  laid,  as  to  encourage  Industry  and  good  Husbandry, 
by  discouraging  their  Opposites."  3  Somewhat  later  Arthur 
Young  also  opposed  Decker's  scheme  and  the  theory  of  inci- 
dence on  which  it  was  based.  Taxes  on  houses,  he  thinks, 

1  The  Proposal,  p.  114.     He  adds  in  another  passage:  "They  are,  in  reality, 
Factors  between  the  Landholders  and  Consumers  of  Commodities  ;  and  every  Man 
knows,  that  a  Factor  must  be  paid  Commission  for  the  Goods  he  sells,  over  and 
above  all  Taxes  and  other  Charges."  —  Ibid.,  p.  116. 

2  "  The  Land-Owners  cannot  sell  or  lett  their  Lands  for  more  Money,  because 
they  pay  this  Tax  out  of  their  Rents  ;  for  a  Buyer  of  Land  considers  what  Money 
it  will  bring  for  his  own  use;  and  a  Farmer  of  Land  must  consider  what  Prices 
his  Corn,  Cattle,  Wool,  Butter,  Cheese,  etc.,  will  fetch  at  Market.  .  .  .     And 
as  the  Prices  of  these  Commodities  are,  and  necessarily  must  be  governed  by 
the  Money  that  People  in  general  can  afford  to  pay  for  them  (Years  of  Scarcity 
excepted),  the  Land-Tax  must  fall  upon  the  Land-Owners."  —  Ibid.,  p.  38.     Cf. 
also  p.  104. 

8  Ibid.,  p.  68.  That  Massie  set  his  face  sternly  against  any  further  increase  of 
taxation  is  shown  by  two  interesting  pamphlets,  in  which  he  has  not  a  little  to  say 
about  the  question  of  incidence.  See  Reasons  humbly  offered  against  laying  any 
further  British  Duties  on  Wrought  Silks  of  the  Manufacture  of  Italy,  the  King- 
dom of  Naples  and  Sicily,  or  Holland :  shelving  the  probable  III  Consequences  of 
such  a  Measure  in  regard  to  the  Landed  Interest,  Woollen  Manufactures,  Silk 
Manufacturies,  Fisheries,  Wealth  and  Naval  Power  of  Great  Britain.  London, 
1758.  This  contains  a  bibliography  of  Massie's  writings  up  to  that  date.  Cf.  also 
his  Observations  on  the  new  Cyder-  Tax,  so  far  as  the  same  may  affect  our  Woollen 
Manufacturies,  Newfoundland  Fisheries,  etc.  London,  1764.  For  Massie's  atti- 
tude on  the  question  of  the  shifting  of  taxes  to  the  poor,  see  above,  p.  44.  In  his 
two  other  important  tracts  on  taxation,  Massie  rather  neglects  the  subject  of  inci- 
dence. See  his  Calculations  of  Taxes  for  a  Family  of  Each  Rank,  Degree,  or 
Class  for  one  Year.  1756.  A  reply  to  this  was  made  by  Bourchier  Cleeve,  and 
a  rejoinder  by  Massie  in  A  Letter  to  Bourchier  Cleeve,  Esq.,  concerning  his  Calcu- 
lations of  Taxes.  1757 


Those  who  favor  a  Single  Tax  on  Houses       65 

force  a  man  to  pay  not  because  he  consumes,  but  because  he 
possesses ;  the  one  [the  excise  or  the  tax  on  consumption]  is 
a  proof  he  is  able  to  pay,  the  other  [the  tax  on  houses]  no 
proof  of  it  at  all.1  This  is  the  last  reference  to  the  scheme, 
for  with  the  introduction,  shortly  after,  of  the  tax  on  inhabited 
houses  by  Lord  North  the  agitation  for  a  single  tax  of  this 
kind  came  to  an  end. 

1  Political  Arithmetic.  By  Arthur  Young.  London,  1774,  chap,  iii,  sec.  i,  esp. 
p.  214.  During  the  revolutionary  era  in  France  a  similar  scheme  for  a  single  tax 
on  houses  was  again  advanced  as  an  entirely  novel  idea.  See  Plan  de  Revolution 
concernant  les  Finances,  ou  Decouverte  Consolante  de  Vlmpbt  Unique  du  Toise. 
Par  M.  Blanc-Gilli,  de  Marseille.  Paris,  1790.  See  esp.  the  Supplement  a  la 
Decouverte  de  V Impbt  du  Toise,  pp.  78  et  seq. 


CHAPTER  IV 
THOSE  WHO  FAVOR  A  GENERAL  PROPERTY  TAX 

BY  the  close  of  the  seventeenth  century  the  old  general 
property  tax  in  England  had  become  in  fact  what  it  soon 
became  in  name  —  a  land  tax.1  There  was  not  lacking  then, 
as  now,  a  group  of  writers  who  believed  that  the  panacea 
for  existing  evils  was  to  be  found  in  the  reimposition  of  a 
tax  on  the  various  kinds  of  personal  property,  and  espe- 
cially of  intangible  personalty.  This  belief  most  commonly 
took  form  in  demands  for  a  tax  on  moneys  at  interest,  sup- 
plemented a  little  later  by  calls  for  a  tax  on  the  evidences  of 
debt  or  on  funds  in  general.  All  these  demands  were  based 
on  the  theory  that  a  tax  on  loans  would  fall  on  the  lender. 

The  earliest  formulation  of  such  a  demand  is  found  in  a 
work  of  the  younger  Culpeper.2  Taxes  on  land,  says  he, 
fall  on  the  landowner,  while  taxes  on  trade  and  luxury  rest 
there  and  leave  the  usurer  free.3  Taxes  on  moneys  at  inter- 
est, however,  would  not  only  diminish  the  curse  of  usury, 
but  since  they  fall  on  the  lender,  they  would  raise  the  value 
of  land,  which  now  bears  far  more  than  its  proportion  of 
taxes.* 

1  See  Seligman,  Essays  in  Taxation,  2d  ed.,  1897,  PP-  45~48- 

2  The  Necessity  of  Abating  Usury  re-asserted;  in  a  Reply  to  the  Discourse  of  Mr. 
Thomas  Manley  entituled,  Usury  at  Six  per  Cent,  examined,  etc.,  together  with  a 
Familiar  and  inoffensive  way  propounded  for  the  future  Discovery  of  summes  at 
Interest,  that  they  may  be  charged  with  their  equal  shares  of  Publick  Taxes  and 
Burthens,  etc.     By  Sir  Thomas  Culpeper,  Jun.,  Knight.      London,  1670.      For 
Manley's  treatise,  and   his  views  on  the  question,  see  above,  p.  31.      For  an 
earlier  work  of  Culpeper,  and  his  views,  see  above,  p.  13. 

3  Ibid.,  pp.  5-7. 

*  "  I  cannot  but  with  trouble  reflect,  that  Land  and  Trade  should  so  conspire  to 
play  the  Usurers  game  against  themselves,  as  by  their  discord  all  along  they  have 

66 


Those  who  favor  a  General  Property  Tax      67 

Another  writer,  who  entered  more  thoroughly  into  the  dif- 
ficulties connected  with  the  problem  of  incidence,  was  not 
blind  to  the  fact  that  in  the  ordinary  course  of  events,  a  tax 
on  interest  tends  to  be  shifted  to  the  borrower.  He  believed, 
however,  that  this  might  be  prevented  by  an  act  of  Parlia- 
ment, and  that  the  tax  might  be  enforced  through  a  compul- 
sory registration  of  all  debts  and  mortgages.1  In  the  same 
way,  Davenant,  who  thought  that  "  there  is  nothing  too  hard 
for  the  wisdom  of  a  parliament  to  bring  about,'*  proposed  a 
tax  on  "  the  usurers,  who  are  the  true  drones  of  a  common- 
wealth, living  upon  the  honey  without  any  labour."2  This 
was,  however,  only  a  passing  fancy  of  Davenant,  whose  fun- 
damental theory  of  incidence  was  somewhat  different.3 

Other  writers  wished  to  include  not  only  moneys  at  interest, 
but  all  kinds  of  personalty,  to  form  a  general  property  tax. 
Thus,  one  author,  who  objected  to  the  "sole  Land-Taxes/'4 
demanded  that  "Sums  at  Interest  with  all  other  Liquid 
Revenues  shall  pay  the  Quota  in  a  due  proportion  with  our 
Land-Rents."  This  "  due  proportion,"  as  he  soon  attempts 

done;  The  trader  crying,  taxe  Land,  in  Gods  name,  for  that  will  bear  it,  trade 
cannot;  And  the  Land-lord  of  late,  spare  Land,  for  Gods  sake,  it  hath  already 
been  taxed  to  death;  Taxe  now  our  superfluous  trade,  and  therein  our  luxury; 
Giving,  it  seems,  the  Usurer  over  to  his  Reprobate  sense,  and  therefore  freely 
permitting  him  to  thrive  in  this  World;  But  little,  in  the  mean  time,  considering, 
that  tillage  and  traffick  lay  in  one  belly  the  Earth,  sayle  in  one  bottom  upon  the 
Sea,  and  fear  one  Pyrate  or  vermine,  the  Usurer." — Ibid.,  p.  15. 

1  A  Plain  and  Easie  Way  for  the  Speedy  Raising  of  Money  to  supply  their 
Majesties  Present  Occasions :  which  will  also,  -very  much  tend  to  the  Advancing  the 

Value  of  Lands.  By  a  Divine  of  the  Church  of  England.  London,  1691.  Cf. 
esp.  pp.  12,  30,  31. 

2  These,  he  thinks,  "  should,  of  all  people,  be  brought  in  to  bear  their  propor- 
tion of  the  common  burden."   "As  yet,"  he  adds,  "  they  could  never  be  effectually 
reached  but  they  may  be  fetched  in  by  the  wisdom  of  a  parliament,  if  the  house 
of  commons  would  please  resolutely  to  set  themselves  about  it."  —  An  Essay  upon 
Ways  and  Means  of  supplying  the   War.     [By  Charles  Davenant.]     London, 
1695.     Reprinted  in  Collected  Works  of  Davenant,  edited  by  Whitworth.    Lon- 
don, 1771.     Cf.  vol.  i,  p.  57  of  the  reprint. 

8  See  below,  p.  73. 

4  A  Letter  from  a  Gentleman  to  his  Friend,  by  way  of  Answer  to  one  from  Him, 
shewing  the  Present  Expedient  and  Easiness  of  Equal  Taxing.  [By  R.  S.] 
London,  n.d.  [about  1692],  p.  10. 


68  Shifting  and  Incidence  of  Taxation 

to  prove,  is  a  considerably  higher  rate  than  that  levied  on 
land.1  Two  other  writers  of  about  the  same  date,  whose 
views  on  the  excise  have  already  been  mentioned,  2  were  also 
heartily  in  favor  of  this  scheme.  The  one  thought  that  a 
tax  on  personalty  joined  to  the  tax  on  lands  would  form  "a 
mixed  and  comprehensive  Quota,  or  Tax  upon  all  Abilities  "  ; 3 
the  other  simply  desired  the  reimposition  of  the  "  Subsidy  or 
Pound  Rate  as  the  Ancient  Methods  of  our  Ancestors."4 
De  Foe  also,  at  the  end  of  the  century,  objected  not  only  to 
the  taxes  on  the  poor,6  but  to  the  inequality  of  the  land  tax,6 
which  he  thought  might  be  remedied  by  assessing  every  one 
according  to  his  stock  of  property.7 

A  few  years  later  the  same  scheme  was  propounded  in  a 
work  written  to  advocate  the  taxation  of  annuities  and  of 
shares  in  the  East  India  Company  and  in  the  Bank  of  Eng- 
land, as  well  as  of  moneys  at  interest.8  The  author's  ideal 
was  a  "  just  and  equal  Tax,  obliging  all  Ranks  and  Degrees  of 

1  He  demands  that  "  all  the  Liquid- Rents  be  charged  to  pay  either  the  double, 
or  at  least  one  Third  part  more  than  the  Land-Rents,  which  are  so  sensibly  liable 
to  grievous  endless  Repairs,  with  abundance  of  other  Charges,  vast  trouble  oft-times 
in  Managing,  and  by  daily  sad  Experience,  severe  Casualties  and  Losses."  —  A 
Letter  from  a  Gentleman  to  his  Friend,  p.  II. 

2  Above,  pp.  22  and  47. 

3  A  Letter  from  a  Gentleman  in  the  Country  to  his  Friend  in  the  City  :  touch- 
ing Sir  William  Petty's  Posthumous  Treatise  entitled  Verbum  Sapienti.     Lon- 
don, 1691,  p.  15. 

*  An  Essay  upon  Taxes  calculated  for  the  Present  Juncture  of  affairs  in  Eng- 
land. London,  1693,  PP-  20-24. 

5  "  In  a  General  Tax,  if  any  shou'd  be  excus'd,  it  shou'd  be  the  Poor,  who  are  not 
able  to  pay,  or  at  least  are  pinch'd  in  the  necessary  parts  of  Life  by  paying."  — 
An  Essay  upon  Projects.     [By  Daniel  De  Foe.]    London,  1697,  P-  v"- 

6  "  And  not  to  run  on  in  Particulars,  I  affirm,  That  in  the  Land-Tax  Ten  certain 
Gentlemen  in  London  put  together,  did  not  pay  for  half  so  much  Personal  Estate, 
call'd  Stock,  as  the  poorest  of  them  is  reputed  really  to  possess."  —  Ibid.,  p.  xi. 

7  "  If  I  were  to  be  ask'd  how  I  wou'd  remedy  this  ?  I  wou'd  answer,  It  shou'd 
be  by  some  Method  in  which  every  man  may  be  tax'd  in  the  due  proportion  to  his 
Estate,  and  the  Act  put  in  execution,  according  to  the  true  Intent  and  Meaning  of 
it ;   in  order  to  which  a  Commission  of  Assessment  shou'd  be  granted  to  Twelve 
Men." — Ibid.,  p.  viii. 

8  An  Essay  concerning  the  Necessity  of  Equal  Taxes  ;  and  the  Dangerous  Con- 
sequences of  the  Encouragement  given  to  Usury  among  us  of  late  Years.    With  some 


Those  who  favor  a  General  Property  Tax      69 

men  to  pay  to  the  support  of  the  Government  in  proportion 
to  their  share  in  the  Publick,  and  the  benefits  they  reap  from 
it."1  This  ideal,  he  thought,  could  be  reached  "by  taking 
of  Money,  according  to  its  product  in  Interest,  as  it  were  so 
much  a  year  in  Land."  2 

The  time  for  such  projects,  however,  had  already  passed, 
although  the  proposition  was  occasionally  revived.  Wagstaffe, 
for  instance,  at  the  beginning  of  the  eighteenth  century, 
painted  in  glowing  colors  the  defects  of  the  existing  system.3 
"  If  a  General  Excise,  and  any  other  Provision  for  an  equal 
Tax  may  be  feasible,"  he  added,  "  no  Man  shall  more  readily 
embrace  it  than  myself."  In  default  of  any  such  scheme,  how- 
ever, he  outlined  his  plan  for  a  tax  on  personal  property,  and 
engaged  "to  shew  that  it  will  be  so  far  from  being  Prejudi- 
cial to  the  Trade  of  the  Nation,  that  'tis  the  only  way  to 
Encourage  and  Support  it."4  In  the  fifth5  and  sixth6  dec- 

Proposals  to  promote  the  Former  and  give  a  Check  to  the  Latter.  By  the  author 
of  The  History  of  the  Last  Parliament.  London,  1702.  This  was  probably 
written  by  James  Drake,  M.D.,  although  it  is  also  ascribed  to  Sir  Richard 
Blackmore  (as  in  the  Manchester  Free  Library  catalogue). 

1  Ibid.,  p.  5. 

2  Ibid.,  p.  II.     "Till  such  a  Scheme  for  raising  Money,"  he  says  in  another 
place,  *'  may  be  contriv'd,  as  shall  reduce  Money  and  Land  to  a  just  proportion 
in  the  expences  of  the  Nation,  the  Publick  will  always  lean  on  the  wrong  side, 
and  be  in  a  tottering  condition."  —  Ibid.,  p.  3. 

8  The  State  and  Condition  of  our  Taxes  considered ;  or,  a  Proposal  for  a  Tax 
upon  Funds  :  shewing  the  Justice,  Usefulness,  and  Necessity  of  such  a  Tax,  in 
respect  to  our  Trading  and  Landed  Interest,  and  especially  if  we  engage  in  a  new 
War,  etc.  By  a  Freeholder  [William  Wagstaffe].  London,  1714.  A  similar 
plan  is  found  in  Fair  Payment  no  Spunge,  etc.  1717.  See  above,  p.  27. 

4  The  State  and  Condition  of  our  Taxes,  p.  16. 

6  Pro  Commodo  Regis  et  Populi.  Publick  Funds  for  Publick  Service,  by  raising 
Three  Millions  of  Money,  or  a  Million  and  a  Half,  with  Ease  and  Ability,  without 
Charge  of  Collecting,  or  affecting  Land  or  Trade,  or  burdening  Tax  upon  Tax. 
In  an  Appeal  to  the  Impartial  and  Common  Understanding  of  all  Mankind. 
London,  1744.  The  author  bases  his  claim  on  the  following  argument:  "The 
Land  is  the  Wealth  of  the  Country,  has  it's  natural,  and  artificial  Product,  The  one 
the  Fruits  of  the  Earth,  the  other  the  Manufactures  and  Labour  of  it;  But  if  it  is 
solely  loaded  with  constant  heavy  Taxes,  it's  Possessors  generally  will  be  poor."  — 
p.  19.  C/.p.  17. 

6  Thoughts  on  the  pernicious  Consequences  of  borrowing  Money.  London, 
I759- 


70  Shifting  and  Incidence  of  Taxation 

ades  of  the  eighteenth  century  we  again  meet  with  allusions 
to  the  scheme.  But  the  current  of  opinion,  as  well  as  the 
actual  practice  of  the  day,  was  so  strongly  against  the 
scheme  of  a  tax  on  personal  property  that  very  few  writers 
took  the  trouble  formally  to  refute  the  reasoning  on  which 
it  was  based.  One  or  two,  indeed,  attempted  to  show  that 
the  reduction  in  the  rate  of  interest  on  the  funds  was  in 
effect  a  tax  on  funds.1  But  such  an  obviously  weak  argu- 
ment was  not  necessary.  Little  more  was  heard  of  the  plan. 

1 "  A  Reduction  of  Interest  is  to  all  Intents  and  Purposes  a  Tax."  —  A  Serious 
Address  to  the  Proprietors  of  the  Publick  Funds,  occasioned  by  several  late  Schemes 
for  Reducing  their  Interest  or  Subjecting  them  to  Taxes  :  in  which  the  Rights  of 
Publick  Creditors  are  explained  and  asserted,  their  just  claim  .  .  .  to  an  exemp- 
tion from  Taxes  fully  demonstrated,  etc.  Humbly  submitted  to  the  Consideration 
of  the  Members  of  the  House  of  Commons.  London,  1744,  p.  41.  "  Those  who 
say  that  Land  and  Trade  have  borne  all  the  Burthen,"  adds  the  author,  "  &  that 
such  as  have  lent  their  Money  to  the  Publick  have  paid  nothing,  really  beg  the 
Question,  and  take  that  for  granted  which  it  is  not  in  their  Power  to  prove,  nay 
the  very  reverse  of  which  is  true."  —  Ibid.,  pp.  36, 37. 


CHAPTER  V 
THOSE  WHO  FAVOR  A  SINGLE  TAX  ON  LAND 

THE  theory  that  all  taxes  are  finally  shifted  to  the  land- 
owner is  commonly  ascribed  to  the  Physiocrats.  Yet  the 
same  theory  was  expounded  in  England  long  before  their 
time.  The  first  inkling  of  the  doctrine  is  found  in  a  cele- 
brated seventeenth-century  tract,  in  which  the  author  con- 
tends that  the  landowners  "  bear  all  the  Taxes  and  publick 
burthens ;  which  in  truth  are  onely  born  by  those  who  buy  and 
sell  not ;  all  sellers  raising  the  price  of  their  commodities,  or 
abating  of  their  goodness,  according  to  their  Taxes." 1 

This  theory  of  incidence  was,  however,  worked  out  much 
more  fully  by  John  Locke.  He  lays  down  his  general  thesis 
in  the  words :  "  Taxes,  however  contrived,  and  out  of  whose 
Hand  soever  immediately  taken,  do,  in  a  Country,  where  the 
great  Fund  is  in  Land,  for  the  most  part  terminate  upon 
Land."  2  To  prove  this,  Locke  first  attempts  to  show  that  a 
tax  levied  on  the  landowner  cannot  be  shifted.  If  the 
"  country  gentleman  "  actually  pays  the  tax  out  of  his  own 

1  Reasons  for  a  Limited  Exportation  of  Wooll.     1677,  p.  5.    The  author  also 
states  that  the  landowners  "  are  Masters  and  Proprietaries  of  the  foundation  of  all 
the  wealth  in  this  Nation,  all  profit  arising  out  of  the  Ground,  which  is  theirs." 
Therefore  it  is  much  more  to  the  interest  of  the  nation  to  "  preserve  the  Nobility, 
Gentry,  and  those  to  whom  the  Land  of  this  Country  belongs  then  a  few  Artificers 
imployed  in  working  the  Superfluity  of  our  Wooll  or  the  Merchants  who  gain  by 
the  exportation  of  our  Manufacture."     This  tract  was  written  as  a  reply  to  Eng- 
land's Interest  by  Trade  asserted,  shewing  the  Necessity  and  Excellency  thereof, 
etc.    By  W.  C.  (William  Carter),  a  Servant  to  his  King  and  Country.     London, 
1671.      It  was   in   turn  answered  by  Carter  in  A    Reply  to  a   Paper  Intituled 
Reasons  for  a  Limited  Exportation  of  Wooll,  or  Objections  against  England's 
Interest.     London,  1689. 

2  Some  Considerations  of  the  Consequences  of  the  Lowering  of  Interest,  and 
Raising  the  Value  of  Money.     In  a  Letter  to  a  Member  of  Parliament.     [By 


72  Shifting  and  Incidence  of  Taxation 

pocket,  says  Locke,  he  certainly  feels  the  burden.  But  "  this 
influences  not  at  all  the  yearly  Rent  of  the  Land,  which  the 
Rack-renter  or  under  Tenant  pays ;  it  being  the  same  thing  to 
him,  whether  he  pays  all  his  Rent  to  the  King  or  his  Land- 
lord." For  the  "  Tenant's  Bargain  and  Profit  is  the  same, 
whether  the  Land  be  charg'd,  or  not  charg'd  with  an  Annuity 
payable  to  another  Man."  The  landowner,  in  other  words, 
cannot  shift  a  land  tax.1 

But  how  is  it,  if  taxes  are  levied  not  on  land  but  on  com- 
modities ?  A  tax  on  commodities,  says  Locke,  must  raise  the 
price  of  the  commodities  to  the  consumer.  "  Let  us  see  now 
who  at  long  run  must  pay  this  and  where  it  will  light."  "  'Tis 
plain,  the  Merchant  and  Brokre,  neither  will  nor  can;  for 
if  he  pays  more  for  Commodities  than  he  did,  he  will  sell 
them  at  a  Price  proportionably  raised."  On  the  other  hand, 
the  "poor  Labourer  and  Handicraftsman  cannot;  for  he  just 
lives  from  hand  to  mouth  already."  The  consequence  of  a 
tax  on  the  laborer  will  be  either  that  "  his  Wages  must  rise 
with  the  Price  of  things,  to  make  him  live,  or  else,  not  being 
able  to  maintain  himself  and  Family  by  his  Labour,  he  comes 
to  the  Parish ;  and  then  the  Land  bears  the  Burthen  a  heavier 
way."  But  if  the  laborer's  wages  rise,  the  farmer  who  must 
pay  "  more  for  Wages  as  well  as  other  things,  whil'st  he  sells 
his  Corn  and  Wool,  either  at  the  same  rate,  or  lower,  at  the 
Market  (since  the  Tax  laid  upon  it  makes  People  less  for- 
ward to  buy)  must  either  have  his  Rent  abated,  or  else  break' 
and  run  away  in  his  Landlord's  Debt,  and  ...  so  the  yearly 
Value  of  the  Land  is  brought  down,  and  who  then  pays  the 
Tax  at  the  years  end  but  the  Landlord  ? "  2 

A  tax  on  commodities  imported,  he  continues,  will  always 
be  shifted  from  the  merchant  to  the  consumer.  In  fact,  the 
importer  will  generally  expect  a  profit  and  "  raise  his  price 

John  Locke.]  London,  1692,  p.  87.  The  date  of  this  work  is  generally  given  as 
1691.  But  although  the  epistle  dedicatory  bears  the  date  of  Nov.  7,  1691,  the  book 
itself  has  the  imprint  1692.  The  passage  quoted  in  the  text  may  also  be  found 
reprinted  in  the  Collected  Works  of  John  Locke,  I2th  edition,  1824,  vol.  iv,  p.  55. 

1  Some  Considerations,  pp.  88,  89. 

2  Ibid.,  p.  91. 


Those  who  favor  a  Single  Tax  on  Land        73 

above  what  his  Tax  comes  to."  For  "you  must  not  think 
that  the  raising  their  Price  will  lessen  the  vent  of  fashionable, 
Foreign  Commodities  amongst  you."  1  With  the  produce  of 
land  it  is  different.  "  Your  Landlord  being  forced  to  bring 
his  Commodities  to  Market,  such  as  his  Land  and  Industry 
afford  him,  common  and  known  things,  must  sell  them 
there  at  such  price  as  he  can  get."  When  a  tax  is  laid  on 
these  "homebred  Commodities,"  which  are  seldom  "the 
Favourites  of  your  people,  every  one  makes  as  sparing  a  use 
of  them  as  he  can ; "  prices  will  fall  and  rents  will  decrease. 

Hence  Locke  concludes  in  the  famous  passage  :  "  It  is  in 
vain,  in  a  Country  whose  great  Fund  is  Land,  to  hope  to  lay 
the  publick  charge  of  the  Government  on  anything  else,  there 
at  last  it  will  terminate.  The  Merchant  (do  what  you  can) 
will  not  bear  it :  the  Labourer  cannot,  and  therefore  the  Land- 
owner must ;  and  whether  he  were  best  to  do  it,  by  laying 
it  directly  where  it  will  last  settle,  or  by  letting  it  come  to 
him  by  the  sinking  of  his  Rents,  which  when  they  are  once 
fallen,  every  one  knows  are  not  easily  raised  again,  let  him 
consider."  2 

Locke's  theory  was  soon  accepted  by  a  number  of  writers. 
One  of  the  earliest  was  the  renowned  financier  Davenant. 
But  while  Davenant  accepts  Locke's  theory  of  incidence,  he 
does  not  draw  the  conclusion  that  it  is  advisable  to  levy  a  . 
single  tax  on  land.  For  instance,  he  intimates  in  one  place 
that  it  may  be  wise  to  supplement  the  land  tax  by  a  "  tax  on 
money."  3  He  is  also  quite  a  partisan  of  the  excise,  and  asks 
"  Can  any  tax  be  more  reasonable  ?  "  He  thinks,  however, 
that  "  the  proper  commodities  to  lay  excises  upon  are  those 
which  serve  merely  to  luxury,  because  that  way  the  poor 
would  be  least  affected."4  Even  here,  however,  he  believes 

1  Some  Considerations,  pp.  92,  93. 

2  Ibid.,  p.  95,  96.    This  is  the  first  instance  in  English  literature  of  any  allusion 
to  the  term  "  direct  taxes." 

8  See  above,  p.  67. 

4  An  Essay  upon  Ways  and  Means  of  supplying  the  War.  [By  Charles 
Pavenant]  London,  1695.  In  l^e  Collected  Works  of  Davenant,  edited  by 
Whitworth,  London,  1771,  vol.  i,  pp.  65,  66. 


74  Shifting  and  Incidence  of  Taxation 

that  excises  also  fall  ultimately  on  land,  even  if  with  some- 
what less  crushing  force  than  a  direct  land  tax.1  Dave- 
nant,  in  fact,  holds  that  the  farther  off  taxes  are  laid 
from  the  producer,  the  smaller  will  be  their  tendency 
to  rest  on  the  land.2  But  this  tendency,  he  admits, 
cannot  be  entirely  arrested ;  and  he  does  not  shrink 
from  stating  that  "all  taxes  whatsoever  are  in  their  last 
resort  a  charge  upon  land."3  So  also  Asgill4  and  Cantil- 

1  "Though  excises  will  affect  land  in  no  degree  like  taxes  that  charge  it 
directly,  yet  excises  will  always  lie  so  heavily  upon  the  landed  man,  as  to  make 
them  concerned  in  parliament,  to  continue  such  duties  no  longer  than  the  neces- 
sity of  the  war  continues."  —  An  Essay  upon  Ways  and  Means,  p.  77. 

2  "All  excises  should  be  laid  as  remotely  from  land  as  possible;  it  is  true  they 
yield  less  when  so  put,  because  the  first  maker  is  best  come  at;  but  when  the  last 
manufacturer  or  vender  is  charged,  they  lie  with  most  equality  upon  the  whole 
body  of  the  people,  and  come  not  upon  land  in  so  direct  a  manner."  —  Discourses 
on  the  Publick  Revenues  and  of  the  Trade  of  England.     London,    1698.     In 
Collected  Works,  i,  p.  224. 

In  a  later  work,  Davenant  neglects  this  aspect  of  the  excises,  and  emphasizes 
their  injurious  results  to  trade.  "There  is  scarce  any  of  these  new  Revenues, 
which  do  not  give  Trade  some  desperate  Wound.  The  Additional  Duties  on 
Beer  and  Ale,  and  the  Tax  upon  Malt  are  apparently  a  Burthen  upon  the  Woollen 
Manufactures,  affecting  the  Carder,  Spinner,  Weaver  and  the  Dyer,  who  all  of 
them  must  be  rais'd  in  their  Wages,  when  the  Necessaries  of  Life  are  rais'd  to 
them.  The  Consequences  of  which  will  be,  That  our  Woollen  Goods  must  come 
at  a  heavy  and  disadvantagious  Price  into  the  Foreign  Markets."  —  An  Essay 
upon  the  Probable  Means  of  making  a  People  Gainers  in  the  Ballance  of  Trade. 
By  the  author  of  the  Essay  upon  Ways  and  Means.  London,  1699,  p.  145. 
(Also  in  Collected  Works.}  Cf.  pp.  146,  147,  where  he  discusses  the  bad  influence 
of  the  salt  tax  on  "  Manufactures  and  Navigation."  Cf.  also  a  passage  much 
quoted  at  the  time  of  Walpole's  Excise  scheme :  "  This  may  be  generally  said, 
That  all  Duties  whatsoever,  upon  the  Consumption  of  a  large  Produce,  fall  with 
the  greatest  Weight  upon  the  Common  Sort;  so  that  such  as  think  in  new  Duties 
that  they  chiefly  tax  the  Rich,  will  find  themselves  quite  mistaken;  for  either  their 
Fund  must  yield  little,  or  it  must  arise  from  the  whole  Body  of  the  People,  of 
which  the  richer  Sort  are  but  a  small  Proportion."  This  passage  is  quoted  on  the 
title-page  of  The  Nature  of  the  Present  Excise.  London,  1733,  mentioned  below, 
p.  81. 

8  An  Essay  upon  Ways  and  Means.    In  Collected  Works,  i,  p.  77. 

4  Several  Assertions  Proved  in  order  to  Create  another  Species  of  Money  than 
Gold  or  Silver.  By  John  Asgill.  London,  1696,  esp.  p.  20.  "  Man  deals  in 
nothing  but  Earth;  the  Merchants  are  the  Factors  of  the  world  to  exchange  one 
parte  of  the  earth  for  another.  The  King  himself  is  fed  by  the  labour  of  the  ox 
and  the  Cloathing  of  the  army  and  the  Victualing  of  the  navy,  must  all  be  paid 


Those  who  favor  a  Single  Tax  on  Land       75 

Ion1  were  worthy  precursors  of  the  Physiocrats,  so  far  as 
they  asserted  that  land  was  the  real  foundation  of  all  wealth, 
and  therefore  ultimately  bore  the  weight  of  all  taxes. 

In  the  early  decades  of  the  eighteenth  century,  Locke's 
theory  is  frequently  encountered.  Some  authors,  like  Wood, 
were  quite  content  simply  to  quote  his  views.2  Others  sought 
to  add  to  Locke's  argument.  One  writer,  who  accepts  the 
general  theory,  boldly  takes  issue  with  the  doctrine  as  ex- 
pounded by  Davenant,  and  maintains  that  the  more  indirect 
the  tax,  the  worse  it  will  be  for  the  landowner.3  Another 
writer,  whose  pages  are  filled  with  quotations  from  Locke,  does 
not  deny  that  excises  add  to  the  price  paid  by  the  consumer, 
but  thinks  that  the  producer  also  pays  the  tax,  at  all  events 
in  part.4  He  seeks  to  prove  this  by  an  inductive  study  of 

for  to  the  owner  of  the  soil  as  the  ultimate  Receiver,  and  whatever  the  ultimate 
Receiver  will  demand  or  accept  must  be  a  rule  for  the  intermediate  Receivers  to 
govern  themselves  by."  Asgill  was  first  quoted  by  Lauderdale  in  An  Inquiry  into 
the  Nature  and  Origin  of  Public  Wealth.  London,  1804,  p.  113. 

1  Cantillon,  Essai  sur  la  Nature  du  Commerce  en  General^  1755.     (Transla- 
tion of  the  English  work  written  before  1734  but  not  published.)     See  esp.  chap, 
xii :  "  Tous  les  Ordres  et  tous  les  Hommes  d'un  Etat  subsistent  ou  s'enrichissent 
aux  depens  des  Proprietaires  des  Terres." 

2  A  Letter  to  a  Member  of  Parliament :  shewing  the  Justice  of  a  more  equal  and 
impartial  Assessment  on  Land :  the  Sacredness  of  Publick  Engagements  :  the  Ad- 
vantages of  lowering  the  Customs  and  high  Duties  on   Trade  :  And  the  Ease  of 
reducing  by  Degrees  the  Debts  of  the  Nation.     London,  1717,  esp.  pp.  7  and  28. 
If  this  pamphlet  was  not  written  by  William  Wood,  he  must  be  accused  of  plagi- 
arism.    For  in  a  large  work  of  the  next  year,  which  Wood  wrote,  we  find  whole 
pages  on  the  subject  of  taxation,  including  extracts  from  Locke,  copied  word  for 
word  from  the  pamphlet,  without  mentioning  it  at  all.     Cf.  A  Survey  of  Trade 
in  Four  Parts  .  .  .  together  with  Considerations  on  our  Money  and  Bullion.    [By 
William  Wood.]    London,  1718,  pp.  68-72,  where  pp.  5-8  of  the  pamphlet  are 
copied  bodily.    Wood,  however,  does  not  go  quite  as  far  as  to  advocate  the  single 
tax  on  land.     He  simply  objects  to  taking  off  any  taxes  on  land. 

3  "  If  Land  Owners  can  and  do  prevent  the  Load  of  a  Tax  from  falling  directly 
and  immediately  on  themselves,  yet  in  the  last  Resort  there  it  will  fall,  let  them 
shift  it  seemingly  as  far  off  as  they  will  in  the  first  Imposition ;  and  perhaps  just 
so  much  farther  off  from  them  as  it  is  laid  in  the  first  Instant,  and  according  to 
common  View  and  Estimation,  just  so  much  the  more  heavily  it  comes  upon  them 
at  the  last." — An  Essay  on  Leases  and  Annuities.     London,  n.d.  [circa  1730], 
p.  109. 

4  "  There  is  no  Doubt  but  the  last  Retaler  of  excisable  Goods  makes  an  Addi- 


76  Shifting  and  Incidence  of  Taxation 

the  malt  tax.  The  same  result,  he  thinks,  is  clear  from  a 
scrutiny  of  the  "  duty  on  lights,"  which  was  intended  as  a 
tax  on  the  tenant,  and  yet  turned  out  to  be  a  tax  on  the 
owner.1  "In  this  Instance,"  says  our  author,  "we  see  how 
readily  and  quickly  the  Tax  centers  in  the  Landlord ;  from 
whence  one  would  suspect  that  this  is  the  Case  in  most  of  the 
excisable  Goods."2  "The  many  windings  and  turnings  in 
Trade,"  he  concludes,  "may  make  it  longer  e'er  the  Tax 
reaches  the  Landholder,  and  may  prevent  our  discovering  how 
it  takes  its  Course,  yet  there  it  must  and  does  come  at  last."  3 

At  the  time  of  Walpole's  excise  scheme,  it  was  but  natural 
that  this  view  should  again  be  emphasized.  One  of  the  dis- 
putants sought  to  crush  his  adversary  by  stating  that  "it 
hath  been  fully  proved  by  unanswerable  Authority  that  all 
Taxes,  in  this  Kingdom,  must  ultimately  affect  Land."  4  But 
after  Locke,  the  theory  was  most  fully  explained  at  about 
the  same  time,  although  independently  of  the  excise  contro- 
versy, by  Vanderlint,  with  whose  views  on  the  subject  of  the 
workingman  we  have  already  become  acquainted.5 

Vanderlint  contends  that  if  all  the  existing  taxes  were 
suddenly  to  be  abolished  and  to  be  replaced  by  a  tax  on  real 
estate,  the  benefit  would  still  inure  to  the  landowner.  His 

tion  to  the  Price  of  them,  equal  to  the  Tax  laid  upon  them;  and  yet  I  am 
afraid  that  the  first  Producer  pays  it  likewise,  so  that  in  the  Event  'tis  twice 
paid."  —  Some  Thoughts  on  the  Interest  of  Money  in  General,  and  particularly 
in  the  Publick  Funds,  With  Reasons  for  Fixing  the  same  at  a  lower  Rate,  in  both 
Instances,  with  Regard  especially  to  Landholders.  London,  n.d.,  p.  93.  This 
work,  as  appears  from  internal  evidence,  was  published  between  1728  and  1739. 
The  quotations  are  made  from  the  second  edition. 

1  "The  Custom  in  some  Places,  I  may  say  in  some  Countries,  is  to  throw  it  on 
the  Owners,  and  they  discount  it  as  regularly  as  they  do  the  Land  Tax."  —  Ibid.t 
p.  94. 

2  "  Since  the  Pretext  of  the  Duty,"  he  adds,  "  is  so  good  a  Handle  to  beat 
down  the  Price  of  them  in  the  Hands  of  the  first  Producer."  —  Ibid.,  p.  95. 

3  Ibid.,  p.  95. 

4  A  Review  of  the  Excise-Scheme  ;  in  Answer  to  a  Pamphlet,  intitled  The  Rise 
and  Fall  of  the  late  projected  Excise,  impartially  considered.      [By  Pulteney?] 
London,  1733,  p.  22. 

5  Money   answers   all    Things,  etc.     By   Jacob   Vanderlint.     London,    1734. 
For  the  full  title,  see  above,  p.  42. 


Those  who  favor  a  Single  Tax  on  Land       77 

argument  is  as  follows:  prices  of  commodities,  when  freed 
from  taxation,  either  will  remain  the  same  or  will  fall.  If 
they  remain  the  same,  —  assuming  also  that  there  has  been 
no  change  in  the  money  supply,  —  the  cost  of  production 
will  decrease,  because  of  the  abolition  of  the  tax  on  the  pro- 
ducers. The  difference  between  cost  and  price,  however,  is 
rent.  Hence,  the  only  result  will  be  to  increase  the  rent 
of  the  landowner.1  On  the  other  hand,  if  the  prices  fall, 
demand  will  increase.  But,  since  all  commodities,  in  last 
resort,  come  from  the  land,  this  increased  demand  means 
higher  rent.2  Thus,  from  either  point  of  view,  remission  of 
taxes  redounds  to  the  welfare  of  the  landlord.  In  other  words, 
the  incidence  of  all  taxes  is  on  the  land.  Vanderlint  accord- 
ingly proposed  a  single  tax  on  land,  as  at  once  far  cheaper 
and  far  better  than  the  existing  complicated  and  inconven- 
ient taxes,  which  after  all,  in  his  opinion,  finally  fall  on  land. 
This  view  of  the  incidence  of  taxation  occasionally  appeared 
in  subsequent  decades.  Thus,  during  the  forties,3  one  writer 
seeks  to  prove  at  some  length  that  not  only  do  "Taxes  laid 
upon  our  Home  consumption  center  chiefly  in  the  Land- 
owner," but  "the  same  must  be  true  of  the,  any  other  way, 

1  "Suppose  the  Cash,  amongst  the  People  in  general,  to  be  what  it  now  is; 
and  that  all  the  Taxes  were  taken  off  Goods;  it's  evident,  this  would  not,  in  the 
End,  lower  the  Price  of  Goods  to  the  Consumers;  since  that  Price  .  .  .  depends 
on  the  Quantity  of  Money  circulating  amongst  the  People:    But  if  the  Duties 
were  taken  off  Goods,  they  must  cost  as  much  less  than  they  do  now,  as  the  Taxes 
now  on  them  .  .  .  now  enhance  them;  therefore,  I  think,  if  the  Taxes  were  taken 
off  Goods  and  laid  on  Lands  and  Houses  only,  so  much  more  Money  must  in  this 
Case  come  to  the  Hands  of  the  Farmers  for  the  Produce  of  the  Ground,  as  would 
enable  them  to  pay  as  much  larger  Rents."  —  Ibid,,  pp.  112,  113. 

2  "  If  the  Taxes  were  taken  off  Goods,  they  would  come  Cheaper,  and  Cheap- 
ness would  increase  the  Consumption,  as  Cheapness  of  everything  always  doth; 
and  that  Increase  of  the  Consumption  would  increase  the  Demand  for  those 
Things.    Now  since  everything  is  the  Produce  of  the  Ground,  the  Demand  for  the 
Produce  would  increase  the  Demand  for  Land,  and  that  would  necessarily  raise 
the  Rent,  even  till  all  the  Money  now  paid  for  Taxes,  together  with  all  the  Charge 
they  are  necessarily  attended  with,  would  come  into  the  Landlords  Pockets  for 
Rent."  —  Ibid.,  p.  114. 

8  The  State  of  our  Wool  and  Woollen  Trade  Reviewed.      Wherein  some  Objec- 
tions to  the  Grazier's  Advocate  are  considered,  etc.     London,  1743,  p.  47. 


78  Shifting  and  Incidence  of  Taxation 

advanced  Price  of  the  Necessaries  of  Life."  Another  writer 
of  the  same  date  states :  "It  is  now  no  longer  a  Question ;  all 
men  are  convinced,  and  see  clearly,  that  all  Taxes  ...  do 
either  immediately,  mediately,  or  ultimately,  fall  upon  the 
Land-Holder." l  The  doctrine  was,  however,  presented  to  the 
English  public  for  the  last  time,  although  in  an  alleged 
translation  from  the  French,  as  late  as  the  decade  imme- 
diately preceding  Adam  Smith,  in  the  following  statement : 
"  Since  the  time  of  that  great  metaphysical  legislator,  Locke, 
it  is  an  acknowledged  and  adopted  principle  of  all  who 
reflect  with  any  perspicuity,  that  the  weight  of  every  tax 
upon  consumption,  ultimately  falls  and  sets  heavy  on  the 
proprietors  of  the  soil."  2 

1  The  Axe  (once  more)  laid  to  the  Root  of  the  Tree,  etc.     London,  1743,  p.  6. 
For  the  full  title,  as  well  as  for  some  other  views  of  the  author,  see  above,  p.  53. 

2  A  General  View  of  England ;  Respecting  its  Policy,  Trade,  Commerce,  Taxes, 
Debts,  Produce   of  Land,   Colonies,  Manners,  etc.,  etc.     Argumentatively  stated 
from  the  Year  1600,  to  1762;   In  a  Letter  to  A.  M.  L.  C.  D.     By  M.  V.  D.  M. 
Now  translated  from  the  French,  first  printed  in  1762.     London,  1766,  p.  17. 

Cf.  p.  200. 


CHAPTER  VI 

THOSE  WHO  FAVOR  A  MORE  ECLECTIC  SYSTEM 

FOR  some  time  after  Locke's  theory  of  the  single  tax  on 
land  had  been  propounded,  there  was  but  little  opposition 
either  to  the  scheme  or  to  the  theory  of  incidence  on  which 
it  was  based.  This  was  no  doubt  owing  to  the  fact  that  the 
plan  was  never  seriously  considered  by  the  political  leaders. 
But  when  Walpole  put  forward  his  excise  scheme,  the  prob- 
lem of  incidence  became  a  burning  question.  Several  writ- 
ers not  only  denied  the  general  theory  of  the  shifting  of  all 
taxes  to  land,  but  maintained  that  the  land  tax  itself  did  not 
rest  on  the  land. 

Walpole  himself  is  supposed  to  have  been  the  author  of  a 
tract  in  which  the  theory  is  advanced  that  a  tax  on  land  is 
shifted  to  the  consumer.  "The  Land-tax,"  he  says,  "falls 
heavily  upon  the  People,  by  heightning  the  Rents  of  Lands, 
and  consequently  of  Bread  and  Drink,  and  other  Food:  So 
that  what  the  Land  pays,  the  People  too  pay." l  Another 
writer  who  favors  the  excise  thinks  that  "  where  the  Land  is 
not  Taxed,  doubtless  the  Charge  of  Pasturage,  and  the  Price 
of  Provisions,  will  be  less  in  proportion."  2  He  considers  the 
reduction  of  the  land  tax  desirable  for  other  reasons  also, 
because  "even  the  Labourer  will  find  it  for  his  Benefit; 
since,  according  to  that  Money  which  the  Landed  Man  can 
spare,  the  Labourer  will  be  employed."  3 

1  Some  General  Considerations  concerning  the  Alteration  and  Improvement  of 
Publick  Revenues.     [By  Sir  Robert  Walpole.]     London,  1 733,  p.  9. 

2  A  Letter  to  a  Freeholder  on  the  Late  Reduction  of  the  Land  Tax  to  One  Shil- 
ling in  the  Pound.    By  a  Member  of  the  House  of  Commons.    London,  1732,  p.  21. 

8  Ibid.,  p.  39.  The  author  favors  a  tax  on  salt  for  the  following  remarkable 
reason :  "  All  Men  use  Salt  in  proportion  to  their  Ability,  but  all  Men  do  not  hold 

79 


8o  Shifting  and  Incidence  of  Taxation 

The  fullest  expression  of  this  view  is  found  in  the  work  of 
an  anonymous  pamphleteer  who  addressed  himself  primarily 
to  the  question  of  incidence.1  He  opposes  the  taxation  of 
land,  and  incidentally  favors  the  excise  scheme,  because  the 
land  tax  is,  in  his  opinion,  shifted  to  the  consumer.  The 
smaller  the  land  tax,  the  lower  will  be  the  price  of  provisions. 
This  means  lower  money  wages  for  the  workman,  and  this, 
again,  will  enable  the  employer  to  compete  with  foreigners.2 

In  another  passage,  the  author  states  outright  that  "a 
Land-Tax,  which  affects  all  the  common  Necessaries  of  Life 
of  our  own  Production,  is  an  actual  general  Excise,  in  the 
strict  Sense  of  the  Words."  He  therefore  favors  a  scheme 
like  Walpole's,  because  "  it  is  a  particular  Excise  upon  foreign 
Superfluities  and  Luxuries,  with  a  View  to  take  off  a  general 
Excise  from  the  common  Necessaries."  3  Later  on,  again, 
the  author  tries  to  show  in  considerable  detail  how  a  tax  on 
land  will  raise  the  price  of  all  manufactured  products,  as  well 
as  of  the  produce  of  the  soil.  He  concludes  that  "  whatever 
Tax  be  laid  upon  Land,  the  Rents  and  Produce  thereof  will 

Land  :  to  Multitudes  of  the  former,  there  are  very  few  of  the  latter  ...  Is  it  not 
then  much  more  equal  and  righteous  that  we  should  tax  every  Man  a  little  in  pro- 
portion to  his  Ability,  than  that  we  should  tax  a  very  few  Men  in  a  great  Degree, 
far  beyond  the  Proportion  of  their  Ability  ?  "  —  A  Letter  to  a  Freeholder,  pp.  28, 
29.  A  somewhat  similar  defence  of  the  salt  duty  is  found  in  another  tract  entitled 
A  Vindication  of  the  Conduct  of  the  Ministry,  in  the  Scheme  of  the  Excise  on  Wine 
and  Tobacco,  etc.,  etc.  London,  1734.  The  author  favors  the  salt  tax:  "first 
that  Duty  is  payed  universally  over  the  whole  Nation  and  that  it  costs  but  little  to 
every  one  in  particular."  —  Ibid.,  p.  57. 

1  Englishmen's  Eyes  opened ;  or  All  made  to  SEE,  who  are  not  resolved  to  be 
BLIND:  Being  the  Excise  Controversy  set  in  a  new  Light ;  completely  discussed 
upon  the  just  Principles  of  Reasoning,  and  brought  to  a  fair  and  demonstrative 
Conclusion  :  between  a  Landholder  and  a  Merchant.     London,  1733. 

2  "  By  easing  the  Land,  the  Price  of  all  the  common  Necessaries  and  Con- 
veniencies  of  Life  become  cheaper  ;   .  .  .  when  a  Land-Tax  is  taken  off,  Land- 
lords may  afford  to  ease  their  Tenants,  and  they  of  course  will  ease  the  Poor  in  the 
Price  of  the  Production  of  their  Lands.     The  Poor,  when  they  can  live  cheaper, 
will  work  cheaper;  and  our  Manufactures  will  consequently  be  exported  cheaper." 
—  Ibid.,  p.  7. 

8  "  Far  from  having  a  Tendency,"  he  continues,  "  to  what  the  Judicious  under- 
stand by  a  general  Excise,  no  Step  could  possibly  be  taken  more  effectually  to  free 
us  from  a  general  Excise."  —  Ibid.,  p.  15. 


Those  who  favor  a  More  Eclectic  System      8 1 

be  in  a  continual  Flux  of  Raising,  till  the  Landlord  finds  his 
Gains  to  be  as  great  after  the  Deduction  of  that  Tax,  as 
before  it  was  imposed." *  He  discusses  at  some  length  the 
argument  of  "  Mr.  Lock,"  but  thinks  that  "  gentlemen  have 
wrested  the  Sense  of  this  great  Author,  and  made  him  speak 
their  Sentiments,  not  his  own."  2 

These  writers,  as  we  have  seen,  opposed  the  land  tax, 
because,  among  other  defects,  it  was  shifted  to  the  consumer. 
But  others  who  held  the  same  doctrine  of  incidence  drew 
precisely  the  opposite  conclusion,  favoring  the  land  tax  and 
trying  to  make  it  popular  with  the  farmers  and  with  the  land- 
owning legislators,  just  because  it  would  not  fall  on  them. 
Thus  the  author  of  an  interesting  tract3  thought  that  the 
landlords  raised  their  rents  by  the  amount  of  the  land  tax, 
but  that  the  farmers  did  not  suffer,  because  they  simply 
added  the  tax  to  the  price  of  their  products,  the  weight  of 
the  tax  thus  resting  at  last  on  the  consumer.4 

The  theory  that  the  land  tax  is  shifted  to  the  consumer  was, 
as  we  know,  a  favorite  doctrine  of  Petty.5  It  ran  counter, 
however,  not  only  to  the  popular  understanding,  but  to  the 
ideas  of  most  of  the  writers  that  discussed  the  land  tax,  who 
opposed  or  favored  it  according  to  their  views  as  to  the  desir- 
ability of  taxing  the  landowner.  Thus,  in  the  seventeenth 

1  Ibid.,  p.  54. 

2  By  a  very  involved  and  curious  process  he  comes  to  the  conclusion  that  the 
"  Reasoning  of  Mr.  Lock,  although  he  has  been  frequently  cited  as  an  Authority 
for  laying  the  Burthen  of  the  Revenue  upon  Land,  exactly  quadrates  with  the 
whole  Chain  of  my  Argument  in  Opposition  to  it."  —  Ibid.,  p.  57. 

3  The  Nature  of  the  Present  Excise,  and  the  Consequences  of  its  farther  Exten- 
sion, examined.     In  a  Letter  to  a  Member  of  Parliament.     London,  1733.    The 
author  is  noteworthy  as  being  one  of  the  first  to  propound  the  capitalization 
theory  of  the  land  tax.     See  below,  pp.  137,  138. 

4  "  All  the  Gentlemen  .  .  .  have  had  frequent  opportunities  of  re-setting  their 
Lands,  and  have  indemnified  themselves  by  raising  their  Rents :  What  they  have 
lost  by  the  Tax,  they  have  gain'd  in  their  Rent-rolls.     The  Farmers  themselves 
have  not  felt  it  much,  because  they  have  raised  the  Price  of  Provisions  likewise  in 
Proportion,  as  their  Landlords  have  raised  their  Payments;  so  that  the  greatest 
Burthen  has  lain  all  along  upon  the  Consumer,  who  in  Nine  Instances  out  of  Ten, 
is  a  Labourer  or  Manufacturer."  — Ibid.,  p.  38. 

6  See  above,  p.  19. 
G 


82  Shifting  and  Incidence  of  Taxation 

century,  one  pamphleteer  strongly  upheld  the  land  tax,1 
while  Reynell  as  vigorously  objected  to  it,2  but  neither 
imagined  for  a  moment  that  the  tax  would  not  rest  where 
it  was  imposed. 

Again,  at  the  time  of  the  excise  scheme  most  of  those  who 
favored  the  excise  did  so  because  they  desired  to  relieve  land 
from  the  burdens  resting  on  it.  As  one  of  the  writers  put 
it :  "A  Tax  imposed  upon  Land,  is  utterly  unavoidable.  Let 
a  Freeholder  be  in  narrow  circumstances,  let  him  have  a  large 
Family,  let  him  be  a  frugal  Man,  or  let  his  Case  be  what  he 
will,  he  cannot  help  himself  by  any  Abatement  of  this  Charge 
upon  his  Income.  Such  an  Estate  is  loaded  with  such  a  Bur- 
den, which  no  Management  can  lighten."3 

With  the  greater  diversity  of  taxation  in  the  eighteenth 
century,  the  controversies  over  the  incidence  of  taxation  soon 
covered  more  ground  than  the  land  tax.  With  this  widening 

1  "  It  is  humbly  offered  and  submitted,  whether  there  can  be  any  way  in  the 
World  found,  more  certain,  equal,  and  easie,  to  raise  the  same  (Money),  than  by 
a  Land-Tax :  for  then  they  will  know  what  it  is  they  give,  when  and  how  cer- 
tainly it  will  come  in,  and  the  time  when  the  same  will  end."  —  The  Grand  Con- 
cern of  England ;  explained  in  several  Proposals  offered  to  the  Consideration  of 
the  Parliament.    By  a  Lover  of  his  Countrey  and  Well-wisher  to  the  Prosperity 
both  of  the  King  and  Kingdoms.     London,  1673,  p.  3. 

2  "  Taxes  were  better  raised  any  way  than  from  the  Land,  for  that  drains  Money 
out  of  the  Country  which  seldom  or  never  returns  .  .  .     There  might  be  waies 
found  out,  that  no  Taxes  might  ever  be  laid,  on  the  substantial  part  of  the  Nation, 
Country,  or  City,  Land,  or  Houses. "  —  The  True  English  Interest,  or  an  Account 
of  the  Chief  Natural  Improvements.     By  Carew  Reynell.     London,  1674,  chap. 
25  :   "  Kings  Revenue,  Taxes,  Customs,"  pp.  68, 69.     His  scheme  was  to  lay  a  tax 
"  only  on  the  vices  of  the  People,  as  on  all  Taverns,  Ale  Houses,  Foreign  Needless 
Commodities  and  on  debauched  persons."    To  this  he  added  a  tax  on  bachelors, 
and  high  customs  duties  which  he  thought  would  be  paid  by  the  foreigner. 

8  A  Letter  to  the  Free-holders  of  Great  Britain.  London,  1 733,  p.  27.  "  But 
Wine  and  Tobacco,"  he  adds,  "  are  things  of  quite  another  Kind  ...  A  Man 
may  either  live  comfortably  without  them,  or  lessen  his  Expences  in  them,  as  he 
sees  convenient."  Cf.  for  similar  views  as  to  the  land  tax  A  Letter  from  a  Mem- 
ber of  Parliament  for  a  Borottgh  in  the  West,  to  a  Noble  Lord  in  his  Neighbour- 
hood there,  concerning  the  Excise-Bill  and  the  Manner  and  Causes  of  Losing  it. 
London,  1733,  p.  27.  See  also  The  Rise  and  Fall  of  the  late  Projected  Excise, 
impartially  considered.  By  a  Friend  to  the  English  Constitution.  London,  1733, 
pp.  13,  15,  27. 


Those  who  favor  a  More  Eclectic  System       83 

of  the  field,  the  opposition  to  Locke's  theory  of  the  single  tax 
grew  apace.  Nugent,  for  example,  the  author  of  a  widely 
read  monograph,  maintains  that  "  Mr.  Locke's  position,  taken 
in  its  full  extent  and  without  any  limitations,  is  greatly  contro- 
vertible,"  and  "that  the  maxim  seems  to  go  farther  than 
reason  and  experience  will  warrant."1  He  does  not  object  to 
the  statement  that  a  tax  laid  upon  farmers'  produce  "  makes 
people  less  forward  to  buy" ;  but  he  does  not  see  "why  that 
reason  should  not  have  the  same  operation  upon  other  com- 
modities." The  demand  for  commodities,  he  thinks,  depends 
"  on  the  quantity  of  money  subsisting  in  the  market "  ;  and 
if  this  quantity  is  unchanged,  an  increased  tax  on  the  general 
trader  must  diminish  mercantile  profits.2  The  same  argu- 
ment which  proves  that  a  land  tax  cannot  be  shifted  equally 
shows  that  a  tax  on  traders'  profits  can  likewise  not  be  shifted. 
Nugent,  however,  makes  one  notable  exception,  maintaining 
that  it  is  useless  to  try  to  tax  "moneyed  men"  on  their 
personal  property.  For,  says  he,  taxes  on  mortgages  or  on 
the  public  funds  would  be  shifted  to  the  mortgagor  or  to 
the  public,  respectively,  through  a  corresponding  increase 
in  the  rate  of  interest.3  Finally,  he  objects  to  any  further 
increase  of  the  excise  taxes,  opposing  the  view  that  higher 
taxes  will  induce  the  poor  to  work.4  Therefore,  while  he 
is  confessedly  not  an  advocate  of  any  single  tax  on  land,  he 
objects  to  a  lowering  of  the  land  tax,  which  would  involve 
a  further  increase  in  the  taxes  on  trade  and  commodities. 

1  Considerations  upon  a  Reduction  of  the  Land  Tax.     [By  Robert  Nugent.] 
London,  1749,  p.  9. 

2  "  And  if  additional  taxes  be  laid,  while  the  money,  with  which  commodities 
are  to  be  purchased,  remains  unincreased,  the  traders  must  be  contented  with 
smaller  gains,  or  not  trade  at  all.     And  the  first  part  of  the  alternative  will  always 
be  the  case,  where  the  profits  of  a  nourishing  trade  may  well  support  some  diminu- 
tion."—  Ibid.,  p.  14. 

3  "  Were  mortgages,  or  the  funds,  to  be  taxed,  matters  would  not  be  mended. 
For,  as  taxes,  wherever  placed,  can  have  no  tendency  to  lower  the  interest  of 
money;  they,  who  buy  into  the  funds,  would  buy  so  much  cheaper  as  the  tax 
would  amount  to,  and  the  lender  upon  mortgages  insist  upon  a  higher  rate  of 
interest."  —  Ibid.,  p.  25. 

4  See  above,  p.  42. 


84  Shifting  and  Incidence  of  Taxation 

In  a  later  monograph  Nugent  returns  to  the  charge  and 
speaks  of  the  absurdity  of  those  who  "  contend  for  an  Abate- 
ment of  that  Tax,  preferable  to  all  others,  the  cheapest  levied, 
producing  most,  and  the  least  felt,  of  any.  And  such,  incon- 
testably,  is  the  Land-tax;  which,  bating  the  Word,  affects 
that  Interest,  which  opposes  it  strongest,  less,  than  any  other 
Tax  in  like  Proportion  of  Quantity  and  neat  Produce."  l 

The  general  doubt  as  to  the  truth  of  Locke's  theory  is 
seen  in  a  number  of  other  works.  Thus  an  anonymous  writer 
of  about  the  same  period  maintains  that  the  existing  taxes 
affect  not  only  the  landowner,  but  also  the  laborer  and  the 
trader.2  In  former  times,  he  says,  "when  taxes  were  very 
moderate,  because  they  were  so,  the  necessaries  of  Life  were 
cheap ;  Labour  was  so.  The  consequence  of  which  was,  that 
we  were  enabled  to  work  up  our  Manufactures  so  moderately 
cheap  as  to  command  most  of  the  Markets  of  the  World."3 
A  little  later  Postlethwayt  refers  to  the  opposition  to  Locke's 
theory,  without  attempting,  however,  to  give  his  reasons.4 
Another  writer  refers  more  specifically  to  Locke's  doctrine 
that  taxes  on  commodities  are  indirect  taxes  on  land.5  This 
he  thinks  a  mistake,  not  only  because  wages  do  not  rise  pro- 
portionately with  taxes  on  labor,  but  also  because  trade  is 
able  to  shift  the  burden  of  taxes  to  the  consumer.  It  is 

1  Further  Considerations  upon  a  Reduction  of  the  Land-  Tax :  Together  ivith  a 
State  of  the  Annual  Supplies  of  the  Sinking  Fund,  and  of  the  National  Debt,  at 
various  future  Periods,  and  in  "various  Suppositions.    [By  Robert  Nugent.]    Lon- 
don, 1751,  pp.  90,  91. 

2  Britannia  in  Mourning:  or  a  Review  of  the  Politicks  and  conduct  of  the 
Court  of  Great  Britain  with  Regard  to  France,  the  Ballance  of  Power,  and  the 
True  Interest  of  these  Nations  .  .  .  and  likewise  a  View  of  the  present  State  of 
our  Liberties  and  Trade,  compared  with  what  they  have  been,  etc.     In  a  Dialogue 
between  two  ancient  Patriot  Englishmen,  commonly  known  by  the  names  of,  Jest 
and  Earnest.     London,  1742. 

3  Ibid.,  pp.  13,  14. 

4  "  If  Mr.  Locke's  Observation,  that  all  Taxes  in  general  ultimately  terminat- 
ing upon  landed  (sic}  should  be  exceptionable,  as  some  think  it,  yet,"  etc. — 
Great  Britain's   True  System,  etc.     By  Malachy  Postlethwayt.      London,  1757, 
p.  306. 

5  Considerations  on  the  Policy,  Commerce  and  Circumstances  of  the  Kingdom. 
London,  1771,  chap,  viii:  "On  Taxes,"  p.  60. 


Those  who  favor  a  More  Eclectic  System       85 

the  workman,  not  the  landowner,  upon  whom  the  weight 
finally  rests.1 

The  most  famous  opponents  of  the  single  tax  on  land, 
however,  were  the  two  chief  economists  of  the  third  quarter 
of  the  eighteenth  century,  Hume  and  Steuart.  Hume  attacks 
Locke's  doctrine  on  the  ground  that  every  one  tries  to  shift 
the  tax  to  some  one  else ;  and  that  there  is  no  reason  to  sup- 
pose that  the  landowners  are  weaker  in  this  respect  than 
other  classes  of  society.  "  Every  man,  to  be  sure,"  says 
Hume,  "  is  desirous  of  pushing  off  from  himself  the  burthen 
of  any  tax,  which  is  impos'd,  and  laying  it  upon  others :  But 
as  every  man  has  the  same  inclination,  and  is  upon  the  de- 
fensive ;  no  set  of  men  can  be  supposed  to  prevail  altogether 
in  this  contest.  And  why  the  landed  gentlemen  shou'd  be 
the  victim  of  the  whole,  and  shou'd  not  be  able  to  defend 
himself,  as  well  as  others  are,  I  cannot  readily  imagine."2 
Hume  thinks  that  the  principle  "  tho'  first  advanc'd  by  a  cele- 
brated writer,  has  so  little  appearance  of  reason,  that  were  it 
not  for  his  authority,  it  had  never  been  receiv'd  by  anybody." 

In  another  celebrated  passage,  Hume  discusses  the  maxim 
of  the  "  ways  and  means  men,"  which  he  accepts  in  part 
"  that  every  new  tax  creates  a  new  ability  in  the  subject  to 
bear  it."  He  points  out  that  the  consequences  of  laying  a  tax 

1  "  Mr.  Locke  was  of  opinion,  that  taxes  upon  commodities  affect  the  landed 
interest  more  than  if  laid  directly  upon  land;  which  would  be  a  good  deal  the 
case,  if  the  prices  of  labour  were  raised  proportionally  to  the  increase  of  taxes; 
but  that  has  not  been  done  in  this  country.     There  is  indeed  no  taxing  of  traders 
in  the  articles  of  their  traffic,  because  they  are,  and  ever  will  be,  the  raters  of  the 
values  of  their  own  commodities :  so  that  experience  shews,  for  a  small  tax  laid 
on  any  thing  they  deal  in,  they  will  make  a  large  consideration  in  price.    Thus 
those  whose  single  commodity  is  labour;  are  taxed  by  government,  directly  for 
their  windows,  for  statute-work  and  most  commodities  they  consume,  and  they  are 
indirectly  taxed  by  land-owners  in  the  increase  of  farm-rents,  because  the  farmer 
raises  proportionally  the  prices  of  his  commodities;  while  other  dealers  add  to  the 
taxes  that  are  laid  on  the  commodities  they  sell,  another  to  themselves  in  the 
prices  which  they  exact;    without  workmen  having  any  advance  in  their  own 
wages  that  is  equivalent."  —  Ibid.,  pp.  60-62. 

2  Political  Discourses.     By  David  Hume,  Esq.     Edinburgh,  1752.    Chap,  viii: 
"Of  Taxes,"  p.  121.    The  quotations  are  from  the  second  edition,  published  in 
the  same  year. 


86  Shifting  and  Incidence  of  Taxation 

on  commodities  consumed  by  the  common  people  are  ordi- 
narily supposed  to  be  a  diminution  of  wages  so  that  the  laborer 
bears  the  burden  himself,  or  an  increase  of  wages  whereby 
the  burden  is  shifted  to  the  employer.  "But,"  he  adds, 
"  there  is  a  third  consequence,  which  very  often  follows  upon 
taxes,  viz.t  that  the  poor  encrease  their  industry,  perform 
more  work,  and  live  as  well  as  before,  without  demanding 
more  for  their  labour."1 

Hume  here  seems  to  share  the  opinion  already  discussed,2 
that  taxes  act  as  a  spur  to  industry.  But  if  his  reasoning  be 
attentively  considered,  it  will  be  seen  that  he  is  not  willing  to 
push  the  theory  very  far.  For  in  the  first  place,  he  limits 
the  doctrine  to  taxes  other  than  those  imposed  upon  neces- 
saries of  life;  and,  secondly,  even  as  to  these  he  is  doubtful. 
"  This  doctrine,"  he  tells  us,  "  may  be  admitted  in  some  de- 
gree: But  beware  of  the  abuse.  Exorbitant  taxes,  like 
extreme  necessity,  destroy  industry,  by  engendring  despair; 
and  even  before*  they  reach  this  pitch,  they  raise  the  wages 
of  the  labourer  and  manufacturer  and  heighten  the  price  of 
all  commodities.  An  attentive,  disinterested  legislature  will 
observe  the  point,  where  the  emolument  ceases,  and  the 
prejudice  begins."3 

The  fullest  discussion  of  the  incidence  of  taxation  before 

1  "  Where  taxes  are  moderate,"  he  goes  on  to  say,  "  and  affect  not  the  necessa- 
ries of  life,  this  consequence  naturally  follows  ;  and  'tis  certain  that  such  diffi- 
culties often  serve  to  excite  the  industry  of  a  people,  and  render  them  more 
opulent  and  laborious  than  others,  who  enjoy  the  greatest  advantages." — Politi- 
cal Discourses,  p.  115. 

2  Above,  pp.  32-39. 

8  Ibid.,  p.  118.  Bastable,  Public  Finance,  book  iii,  chap,  ii,  §3  (2d  ed.,  p. 
270),  scarcely  does  Hume  justice  in  seeming  to  ascribe  to  him  the  doctrine  in  its 
extreme  form.  —  Somewhat  analogous  to  the  doctrine  that  taxes  on  production  are 
a  spur  to  industry,  is  the  theory  that  taxes  on  consumption  increase  the  quantity  of 
commodities  consumed.  We  find  this  theory,  not  indeed  in  its  extreme  state- 
ment, but  in  a  modified  form,  formulated  by  Arthur  Young  as  follows :  "  Render 
any  thing  by  taxes  something  more  of  a  distinction  than  formerly,  and  you  will 
find  that  the  tax,  instead  of  checking,  will  increase  the  consumption."  —  Political 
Arithmetic,  1774,  p.  217.  The  same  observation  is  found  in  the  anonymous 
pamphlet  Inquiry  into  the  Connection  between  the  Size  of  Farms  and  the  present 
Price  of  Pro-visions.  London,  1773. 


Those  who  favor  a  More  Eclectic  System       87 

Adam  Smith  is  to  be  found  in  the  works  of  Sir  James  Steuart.1 
He  divides  all  taxes  into  three  kinds,  —  proportional,  cumu- 
lative and  personal.  Proportional  taxes  are  those  that  fall 
upon  expense  (what  we  should  call  indirect  taxes) ;  cumulative 
or  arbitrary  taxes  are  those  that  affect  property;  and  per- 
sonal taxes  are  those  that  consist  of  personal  services.2  Pro- 
portional taxes,  he  says,  are  always  "  drawn  back  "  (that  is, 
shifted)  by  the  industrious  consumer.  Steuart  thinks  a  con- 
sumer "industrious"  in  all  cases,  except  when  the  "consump- 
tion made  by  the  latter  is  an  article  of  superfluity."  In  other 
words,  taxes  on  the  necessaries  of  life  are  shifted  from  wage- 
earner  to  employer  because  the  wage-earner  is  a  "physical 
necessarian  "  who  accumulates  no  profits ; 3  but  if  the  laborer 
spends  his  money  on  taxable  articles  which  other  members  of 
his  class  do  not  use,  he  cannot  shift  the  tax. 

Steuart  illustrates  this  point  as  follows :  "  A  tanner  sells 
his  leather  to  a  shoemaker;  the  shoemaker,  in  paying  the 
tanner  for  his  leather,  pays  the  tanner's  subsistence  and  profit, 
and  the  tax  upon  leather.  The  man  who  buys  the  shoes  for 
his  own  consumption,  refunds  all  this  to  the  shoemaker, 
together  with  his  subsistence,  profit,  and  the  tax  upon  shoes ; 
consequently,  the  price  of  shoes  are  (sic)  raised,  only  by  refund- 
ing the  taxes  paid  by  the  industrious.  But  if  the  shoemaker's 
subsistence  shall  happen  to  include  either  tavern  expences, 
or  his  consumption  on  idle  days,  he  will  not  draw  these  back ; 
because  other  shoemakers  who  do  not  frequent  the  tavern, 
and  who  are  not  idle,  will  undersell  him."  All  proportional 


1  An  Inquiry  into  the  Principles  of  Political  (Economy  :  being  an  Essay  on 
the  Science  of  Domestic  Policy  in  Free  Nations.     By  Sir  James  Steuart,  Bart. 
London,  1767,  book  v,  chaps,  iii-vi,  "Of  Taxes,  and  of  the  proper  application  of 
their  amount."     In  the  edition  of  his  Collected  Works,  published  in  six  volumes 
in  1805,  the  subject  is  contained  in  vol.  iv.     The  quotations  here  are  from  the 
original  quarto  edition,  vol.  ii. 

2  "  A  proportional  tax  is  that  which  is  levied  upon  the  idle  consumer,  at  the 
time  he  buys  the  commodity."     "A  cumulative  tax,  is  the  accumulation  of  that 
return  which  every  individual,  who  enjoys  any  superfluity,  owes  daily  to  the  state, 
for  the  advantages  he  receives  by  living  in  the  society." — Ibid.,  ii,  p.  500. 

3  Ibid.,  ii,  p.  491. 


88  Shifting  and  Incidence  of  Taxation 

taxes,  therefore,  fall  at  last  upon  "the  rich  and  idle  con- 
sumer of  the  manufacture,  who  can  draw  nothing  back  from 
anybody.  .  .  .  The  whole  reimbursement  of  all  former  pay- 
ments and  repayments  lands  upon  him."  Hence  Steuart 
concludes,  "  How  absurd  therefore,  is  it  either  to  say  that  all 
taxes  fall  ultimately  upon  land ;  or  as  others,  for  no  better 
reason,  pretend,  that  they  fall  upon  trade."  "  Proportional 
taxes  never  can  fall  either  upon,  or  affect  any  person  but  the 
idle;  that  is  to  say  the  not  industrious  consumer."1 

With  regard  to  what  he  calls  cumulative  taxes,  Steuart 
lays  down  the  general  rule  that  "the  nature  of  all  these  taxes, 
is,  to  affect  the  possessions,  income  and  profits  of  every  indi- 
vidual, without  putting  it  in  their  power  to  draw  them  back 
in  any  way  whatever;  consequently,  such  taxes  tend  very 
little  towards  enhancing  the  price  of  commodities."2  These 
taxes  ought,  therefore,  in  his  opinion,  generally  to  be  dis- 
countenanced. Taxes  on  land,  he  thinks,  do  not  augment 
the  price  of  wheat  as  similar  taxes  on  commodities  raise  the 
price  of  excisable  goods ;  for,  if  the  proprietor  were  to  at- 
tempt to  raise  the  price  of  his  grain  in  proportion  to  the  tax, 
his  farmer  who  pays  no  land  tax  would  undersell  him.3  All 
attempts  to  levy  a  tax  on  money,  however,  he  regards  as 
certain  to  fail.  A  tax  on  trade  profits,  again,  although  it 
tends  to  rest  on  profits,  is  not  to  be  recommended,  because, 
"  although  they  appear  to  be  income,  I  rather  consider  them 
as  stock,  which  ought  not  to  be  taxed."  4  Steuart' s  final  con- 
clusion is  expressed  in  these  words:  "I  conclude  that  no 
objection  can  lie  against  proportional  taxes,  so  far  as  they 
affect  the  industrious;  because  they  draw  them  compleatly 
back:  and  that  great  objections  lie  against  cumulative  taxes, 
when  they  affect  the  industrious,  because  they  cannot  draw 
them  back ;  and  consequently,  they  may  affect  the  physical- 
necessary  of  the  contributor,  in  case  no  profit  should  remain 
to  him  upon  his  labour.  On  the  other  hand,  I  think  little 
objection  can  be  made  to  cumulative  taxes,  when  they  are 

1  An  Inquiry  into  the  Principles,  etc.,  ii,  p.  494.     Cf.  ii,  p.  510. 

2  Ibid.,  ii,  p.  496.  8  Ibid.,  ii,  p.  552.  4  Ibid.,  ii,  p.  541. 


Those  who  favor  a  More  Eclectic  System       89 

imposed  upon  possessions,  which  produce  a  visible  annual 
revenue,  clear  to  the  proprietors."  1 

It  is  clear,  therefore,  that  by  the  third  quarter  of  the 
eighteenth  century  the  economists,  although  differing  among 
themselves,  were  united  in  opposing  Locke's  theory  of  the 
shifting  of  all  taxes  to  land.  It  is  no  wonder  that  Dugald 
Stewart  wrote,  a  few  decades  later,  in  reference  to  the  plan 
of  the  single  tax  on  land :  "  I  shall  only  remark,  that  the  first 
idea  of  it  was  borrowed  from  this  country,  where  it  has  been 
repeatedly  suggested  by  authors  of  reputation,  although  it 
had  been  almost  forgotten  as  an  exploded  chimera,  when 
it  was  revived  by  the  Economists  of  France."  2  And  Arthur 
Young  wrote  :  "  I  know  not  whether  Mr.  Locke  were  the 
original  father  of  the  doctrine,  that  all  taxes,  laid  in  any  man- 
ner whatsoever,  fall  ultimately  on  land ;  but  whoever  started 
or  supported  it,  contributed  towards  the  establishment  of  one 
of  the  most  dangerous  absurdities  that  ever  disgraced  com- 
mon sense."3 

We  have  now  completed  our  examination  of  the  early  liter- 
ature on  taxation.  We  have  limited  ourselves  to  England 
for  two  reasons :  first,  because  most  of  the  fiscal  writings,  as 
well  as  those  on  economics  in  general,  are  to  be  found  in 
England;  and,  secondly,  because  the  scantier  literature  of 
the  continent  is  very  much  better  known.  The  continental 
literature,  however,  so  far  as  it  discussed  the  incidence  of 
taxation  at  all,  confined  itself  chiefly  to  generalities  on  the 
question  of  direct  versus  indirect  taxation,  and  more  specifi- 

1  Ibid.,  ii,  p.  519. 

2  Lectures  on  Political  Economy  [delivered  in  1800-1801].     Now  first  pub- 
lished.    By  Dugald   Stewart.     Edited  by   Sir  William   Hamilton.     Edinburgh, 
1877,  ii,  p.  238. 

3  Travels  in  France.     By  Arthur  Young.     London,  1794,  i,  p.  590.     Young 
adds,  in  reference  to  the  idea  of  the  single  tax :     "Taxes  should  bear  lightly  on 
an  infinite  number  of  points,  heavily  on  none.     In  other  words,  simplicity  in  taxa- 
tion is  the  greatest  additional  weight  that  can  be  given  to  taxes  and  ought,  in 
every  country,  to  be  most  sedulously  avoided."  —  i,  p.  596.     In  an  earlier  work, 
Political  Arithmetic,  1774,  Young  discusses  Locke's  theories  at  some  length. 
Cf.  pp.  211  et  seq. 


QO  Shifting  and  Incidence  of  Taxation 

cally  to  the  effects  of  the  excise.  In  France  the  two  attempts 
to  develop  a  theory  of  fiscal  reform  that  were  made  by 
Boisguillebert  and  Vauban 1  met  with  such  little  favor  in  court 
circles  that  a  quietus  was  put  on  the  discussion  of  the  topic 
for  more  than  half  a  century.  In  Germany  the  only  treat- 
ment of  the  subject,  apart  from  the  monotonous  productions 
of  the  "  Cameralistic  "  writers,  is  found  in  the  controversial- 
ists on  the  scheme  for  the  general  excise  at  the  close  of  the 
seventeenth  and  the  beginning  of  the  eighteenth  centuries.2 
In  Italy  the  number  of  authors  was  perhaps  more  numerous, 
but  their  influence  was  small.3 

In  our  survey  of  the  English  literature,  we  have  found 
almost  as  many  views  as  there  were  writers.  That  taxes 
remain  where  they  are  imposed,  that  all  taxes  are  shifted  to 
the  landowner,  that  they  are  shifted  to  the  trader,  that  they 
rest  on  the  laborer,  that  they  rest  on  the  rich  consumer,  that 
they  do  not  rest  on  the  consumer  at  all  —  these,  and  varia- 
tions of  these,  doctrines  meet  us  in  bewildering  confusion. 
Yet  even  here  certain  currents  of  thought  may  be  discerned, 
and  the  attempt  has  been  made  in  the  preceding  pages  to 
point  out  the  general  direction  of  these  currents.  The  great 
weakness  in  all  the  discussions,  however,  was  the  lack  of  any 
consistent  economic  theory  in  general,  and  of  a  theory  of 
distribution  in  particular.  Without  such  a  general  definite 
theory  as  a  basis,  the  whole  superstructure  of  the  doctrine  of 
incidence  was  necessarily  both  slight  and  unstable.  It  was 

1  Boisguillebert  wrote  the  Detail  de  la  France,  1697,  and  Factum  de  la  France, 
1707.     Vauban  wrote  the  Projet  d'une  Dime  Roy  ale,  1707.     Vauban's  work  was 
translated  into  English  under  the  title  An  Essay  for  a  General  Tax  ;  or  a  Project 
for  a  Royal  Tythe.    By  the  famous  Monsieur  Vauban,  Marshal  of  France,  etc. 
London,    1709.     The  translation  was   widely  read  and  went   through  several 
editions. 

2  For  these  writers  see  "Der  Accisestreit  deutscher  Finanztheoretiker  im  17. 
und  1 8.  Jahrhundert."     Von  Karl  Th.  von  Inama-Sternegg.     In  the  Tiibinger 
Zeitschrift  fiir  die  gesammte  Staatswissenschaft,   vol.  xxi  (1865),  pp.  514-546. 
Cf.  also  Geschichte  der  National-okonomik  in  Deutschland.   Von  Wilhelm  Roscher. 
Miinchen,  1874,  pp.  319-326. 

8  For  these,  see  Storia  delle  Dottrine  Finanziarie  in  Italia,  Dal  Prof.  G. 
Ricca-Salerno.  Roma,  1881  (2d  edition,  1895). 


^c          : 

Those  who  favor  a  More  Eclectic  System       91 

reserved  for  the  Physiocrats  and  Adam  Smith  to  formulate 
for  the  first  time  a  consistent  theory  of  distribution  as  the 
very  basis  of  the  new  political  economy,  and  it  is  accordingly 
with  them  that  the  modern  theories  of  the  incidence  of  taxa- 
tion begin.  It  is  these  modern  theories  that  will  now  engage 
our  attention. 


BOOK    II 
THE  MODERN  THEORIES 


CHAPTER  I 

THE  PHYSIOCRATIC  THEORY 

THE  Physiocratic  theory  of  incidence  was  outlined  by  the 
founder  of  the  sect,  Quesnay ;  it  was  developed  by  Mirabeau ; 
it  was  discussed  from  all  sides  by  Mercier  de  la  Riviere, 
by  Du  Pont  de  Nemours,  and  by  the  Abbe*  Baudeau;  and 
it  was  finally  completed  by  various  works  of  Turgot.  The 
theory  may  be  summed  up  as  follows:  Agriculture  is  the 
sole  source  of  wealth.  It  is  the  only  productive  employment 
because  it  alone  furnishes  a  produit  net  or  surplus  above  the 
necessary  expenses  of  production.  These  necessary  ex- 
penses the  Physiocrats  call  the  agricultural  advances  or  out- 
lay. They  are  of  two  kinds :  first,  the  primitive  advances 
(avances  primitives),  consisting  of  the  capital  applied  to  land 
in  the  shape  of  implements,  beasts  of  burden,  clearing  and 
preparing  the  soil ;  and  secondly,  the  annual  advances  (avances 
annuelles),  or  the  capital  spent  on  wages  and  on  maintaining 
the  primitive  advances  —  that  is,  in  keeping  the  land,  ani- 
mals and  tools  in  good  condition.  The  gross  product  is 
called  by  them  the  returns  of  agriculture  (reprises  de  la  cut- 
ture)\  and  after  deducting  from  this  gross  product  the 
annual  advances  plus  the  interest  on  the  primitive  advances, 
there  remains  the  net  produce  or  the  surplus  above  the 
expenses  of  cultivation. 

Agriculture  alone  furnishes  such  a  surplus.  All  other 
occupations  are  utterly  unproductive  or  "sterile."  Industry 
and  commerce  may  be  useful  and  even  necessary  to  a  com- 
munity ;  but  they  are  economically  unproductive.  They  do 
not  create  new  wealth,  but  simply  transform  existing  wealth. 
They  may  increase  values,  but  the  increase  of  value  must  be 

95 


96  Shifting  and  Incidence  of  Taxation 

exactly  equivalent  to  the  labor  expended ;  and  the  value  of 
this  labor  is  in  last  resort  dependent  on  the  value  of  the  food 
or  the  other  objects  furnished  by  the  agricultural  class. 
Since  the  "  net  product "  of  agriculture  is  therefore  the  sole 
fund  or  source  of  wealth,  all  taxes,  however  levied,  must  ulti- 
mately be  paid  from  this  fund.  Hence  it  is  much  better  to 
assess  this  fund  directly  by  a  land  tax,  than  to  assess  it  indi- 
rectly by  any  other  tax.  For  in  this  way  we  save  expense 
and  trouble.  But  whether  we  levy  direct  or  so-called  indirect 
taxes,  the  incidence  is  always  on  the  land. 

Although  there  now  exists  in  English  an  admirable  sketch 1 
of  the  general  economic  doctrines  of  the  Physiocrats,  the 
absence  of  any  detailed  account  of  their  fiscal  views,  as  well 
as  the  lack  of  any  English  translation  of  their  chief  works,2 
justifies  a  somewhat  extended  presentation  of  their  doctrine 
of  the  incidence  of  taxation. 

The  fullest  and  the  best  account  of  the  doctrine  of  inci- 
dence is  found  in  the  works  of  Quesnay.3  This  writer  posits 
the  maxim  that  taxes  should  bear  some  proportion  to  the 
mass  of  national  income,  and  that  they  should  be  imposed 
directly  on  the  net  produce  of  land,  not  on  wages  or  com- 
modities. The  outlay  for  agriculture  should  be  regarded  as 
something  precious,  to  be  preserved  as  a  fund  not  only  for 
the  payment  of  taxes,  but  for  the  creation  of  the  social  in- 
come and  for  the  subsistence  of  the  citizens.  Otherwise, 
taxation  becomes  mere  spoliation.4 

1  Higgs,  The  Physiocrats.     London,  1897. 

2  The  only  English  translation  is  that  of  Turgot,  Reflections  on  the  Formation 
and  Distribution  of  Wealth,  London,  1793;   and  again,  with  a  slightly  different 
title,  in  Professor  Ashley's  Series  of  Economic  Classics,  New  York,  1898.    But  this 
deals  only  to  a  slight  extent  with  problems  of  taxation. 

3  The  best  edition  of  Quesnay's  writings  is  (Euvres  Economiques  et  Philoso- 
phiques  de  F.  Quesnay,  Fondateur  du  Sysieme  Physiocratique,  avec  une  Introduc- 
tion et  des  Notes  par  Auguste  Oncken.      Francfort-sur-le-Main,  1888.     A  less 
complete,  but  more  familiar,  edition  is  that  of  E.  Daire,  in  the  volume  of  the 
Collection  des  principaux  Economistes,  entitled  Physiocrates.     Paris,  1846. 

4  "  Que  lyimpot  ne  soit pas  destructif,  ou  disproportionne  a  la  masse  du  revenu 
de  la  nation  ;  que  son  augmentation  suive  V augmentation  du  revenu  ;  qu'il  soit 
etabli  immediatement  sur  le  produit  net  des  biens  fonds,  et  non  sur  le  salaire  des 


The  Physiocratic   Theory  97 

Quesnay  proceeds  to  illustrate  this  doctrine  as  follows :  A 
well-regulated  tax  should  be  deemed  a  part  of  the  income 
separated  from  the  net  produce  of  the  soil ;  for  otherwise  it 
would  be  impossible  to  frame  any  rule  of  proportion  between 
taxation  and  wealth  or  income.  All  the  taxpayers  might  be 
ruined  before  the  government  would  notice  it.  The  real  net 
produce,  he  continues,  may  be  divided  into  three  parts,  be- 
longing respectively  to  the  state,  to  the  landowner,  and  to 
those  who  collect  the  tithe.  Only  the  landowner's  portion  is 
subject  to  sale,  and  its  price  will  vary  with  the  revenue  it 
yields.  The  landowner's  property  extends  only  to  this  por- 
tion. He  therefore  does  not  pay  the  others  who  share  in  the 
property,  for  their  portions  do  not  belong  to  him,  have  never 
been  acquired  by  him,  and  cannot  be  sold.  The  landowner 
then  must  not  look  upon  a  tax  as  a  charge  imposed  upon  his 
share.  He  does  not  pay  the  ordinary  tax ;  it  is  the  part  of 
the  property  which  does  not  belong  to  him,  that  pays  the 
tax.  It  is  only  in  extraordinary  exigencies,  when  the  very 
safety  of  the  property  itself  is  imperilled,  that  all  the  co-pro- 
prietors must,  for  the  time  being,  share  in  the  burden.1 

homines,  ni  sur  les  denrees,  ou  il  multiplierait  les  frais  de  perception,  prejudicierait 
au  commerce  et  detruirait  annuellement  une  partie  des  richesses  de  la  nation. 
Qu'il  ne  se  prenne  pas  non  plus  sur  les  richesses  des  fermiers  des  biens-fonds; 

Car  LES  AVANCES  DE  L' AGRICULTURE  D'UN  ROYAUME  DOIVENT  ETRE  ENVISAGEES 
COMME  UN  IMMEUBLE  QU'lL  FAUT  CONSERVER  FRECIEUSEMENT  POUR  LA  PRODUC- 
TION DE  L'IMPOT,  DU  REVENU,  ET  DE  LA  SUBSISTANCE  DE  TOUTES  LES  CLASSES  DES 

CITOYENS:  autrement  1'impot  degenere  en  spoliation  et  cause  un  deperissement 
qui  ruine  promptement  un  Etat." —  Maximes  Generates  du  Gouvernement 
£conomique  d'un  Royaume  Agricolc.  1758,  no.  v.  In  Daire's  Physiocrates, 
p.  83;  in  Oncken's  CEuvres  de  Quesnay,  p.  332. 

1  "  L'impot  bien  ordonne  .  .  .  doit  Stre  regarde  comme  partie  du  revenu 
detachee  du  produit  net  des  bien-fonds  ...  Le  produit  net  des  biens-fonds  se 
distribue  a  trois  proprietaires,  a  1'Etat,  aux  possesseurs  des  terres  et  aux  deci- 
mateurs.  II  n'y  a  que  la  portion  du  possesseur  du  bien  qui  soit  alienable,  et  elle 
ne  se  vend  qu'a  raison  du  revenu  qu'elle  produit.  La  propriete  du  possesseur  ne 
s'etend  done  pas  au-dela.  Ce  n'est  done  pas  lui  qui  paye  les  autres  proprietaires 
qui  ont  part  au  bien,  puisque  leurs  parts  ne  lui  appartiennent  pas,  qu'il  ne  les  a  pas 
acquises,  et  qu'elles  ne  sont  pas  alienables.  Le  possesseur  du  bien  ne  doit  done 
pas  regarder  1'impot  ordinaire  comme  une  charge  etablie  sur  sa  portion;  car  ce 
n'est  pas  lui  qui  paye  ce  revenu,  c'est  la  partie  du  bien  qu'il  n'a  pas  acquise,  et 
qui  ne  lui  appartient  pas,  qui  le  paye  a  qui  il  est  du.  Et  ce  n'est  que  dans  les  cas 
H 


98  Shifting  and  Incidence  of  Taxation 

It  should  not  be  forgotten,  Quesnay  warns  us,  that  taxes 
ought  to  be  imposed  on  real  income  —  that  is,  on  the  annual 
net  produce  of  lands  —  and  not  on  the  wages  of  the  farm 
laborer,  or  on  the  wages  of  the  industrial  laborer,  or  on  com- 
modities. If  levied  on  agricultural  wages,  a  tax  would  im- 
pede production,  injure  the  land,  and  ruin  the  farmers,  the 
landowners  and  the  government.  If  levied  on  the  wages  of 
industrial  laborers  or  on  commodities,  a  tax  would  be  arbi- 
trary, the  cost  of  collection  would  exceed  the  yield  of  the 
tax,  and  the  burden  would  fall  without  any  uniformity  on  the 
income  of  the  sovereign  and  of  the  people.  We  must  be 
careful,  he  continues,  to  distinguish  between  a  tax  or  impost 
on  the  one  hand,  and  an  imposition  on  the  other.  Imposi- 
tions would  amount  to  triple  the  imposts,  and  would  extend 
to  the  imposts  themselves ;  for  the  impositions  or  false  taxes 
levied  on  commodities  would  have  to  be  paid  finally  by  the 
imposts  or  real  taxes.1 

The  so-called  tax  or  imposition  on  men  who  live  by  their 
labor,  says  Quesnay,  is  really  a  tax  on  labor,  which  is  neces- 
sarily paid  by  the  employer  just  as  a  tax  on  the  horses  used 
on  a  farm  is  really  a  tax  on  the  expenses  of  cultivation. 
Therefore  a  tax  on  men,  instead  of  on  revenue,  would  rest 
on  the  expenses  of  industry  and  agriculture,  would  fall  with 

de  necessity,  dans  les  cas  ou  la  surete  de  la  propriete  serait  exposee,  que  tous  les 
proprietaires  doivent  pour  leur  propre  interet  contribuer  sur  leurs  portions  a  la 
subvention  passagere  que  les  besoins  pressants  de  1'Etat  peuvent  exiger."  —  Daire, 
pp.  83,  84;  Oncken,  pp.  337,  338. 

1  "  Mais  il  ne  faut  pas  oublier  que  dans  tous  les  cas  1'imposition  du  tribut  ne  doit 
porter  que  sur  le  revenu,  c'est-a-dire  sur  le  produit  net  annuel  des  biens  fonds;  et 
non  sur  les  avances  des  laboureurs,  ni  sur  les  homines  de  travail,  ni  sur  la  vente  des* 
marchandises,  car  autrement  il  serait  destructif.  Sur  les  avances  des  labourers  ce1 
ne  serait  pas  un  impot,  mais  une  spoliation  qui  eteindrait  la  reproduction,  dete- 
riorerait  les  terres,  ruinerait  les  fermiers,  les  proprietaires  et  1'Etat.  Sur  le  salaire 
des  homines  de  travail  et  sur  la  vente  des  marchandises,  il  serait  arbitraire,  les 
frais  de  perception  surpasseraient  1'impot,  et  retomberaient  sans  regie  sur  les 
revenus  de  la  nation  et  sur  ceux  du  souverain.  II  faut  distinguer  ici  1'imposition 
d'avec  I'impSt ;  1'imposition  serait  le  triple  de  1'impot,  et  s'etendrait  sur  1'impot 
meme;  car,  dans  toutes  les  depenses  de  1'Etat,  les  taxes  imposees  sur  les  mar- 
chandises seraient  payees  par  I'impdt.  Ainsi  cet  impot  serait  trompeur.et  ruineux." 
—  Daire,  p.  54;  Oncken,  p.  338. 


The  Physiocratic  Theory  99 

redoubled  force  on  the  revenue  of  land  (since  all  industry 
rests  on  the  land),  and  would  rapidly  lead  to  the  destruction 
of  real  taxation  itself.  The  same  may  be  said  of  taxes  on 
commodities. 

A  tax  levied  indiscriminately  on  land,  on  products,  on  men, 
on  labor,  on  commodities  and  on  beasts  of  burden  would 
involve  a  combination  of  six  equal  taxes,  superimposed  the 
one  on  the  other,  all  resting  on  the  same  base  and  yet  paid 
separately  —  but  all  together  yielding  less  revenue  than  a 
simple  real  tax,  assessed  without  expense  and  solely  on  the 
net  produce.  Such  a  tax,  suggested  by  the  order  of  nature, 
would  greatly  increase  the  revenue  of  the  sovereign,  but 
would  nevertheless  cost  the  nation  and  the  state  five-sixths 
less  than  the  taxes  imposed  on  everything.  The  latter, 
moreover,  would  annihilate  the  country's  production  and 
would  exclude  all  possibility  of  ultimate  reform.  For  these 
taxes,  illusory  for  the  sovereign  and  ruinous  to  the  nation, 
appear  to  the  vulgar  all  the  more  inevitable  as  the  decay  of 
agriculture  progresses. 

Quesnay  concludes,  therefore,  that  taxes  should  be  imposed 
directly  on  the  net  produce  of  land ;  for,  no  matter  how  the 
tax  is  imposed,  it  is  always  paid  by  the  land.  Hence  the 
form  of  taxation  which  is  at  once  the  simplest,  the  best  regu- 
lated, the  most  productive  and  the  least  burdensome,  is  that 
which  is  levied  proportionally  to  net  produce  and  directly  on 
the  source  of  the  ever  new-born  wealth.1 

In  another  work,2  Quesnay  devotes  himself  specifically 
to  the  problem  of  indirect  taxation.  Some  indirect  taxes, 
he  tells  us,  are  comparatively  simple  and  economical.  Such, 

1  "  L'impot  doit  done  8tre  pris  immediatement  sur  le  produit  net  des  biens- 
fonds;  car,  de  quelque  maniere  qu'il  soit  impose  dans  un  royaume  qui  tire  ses 
richesses  de  son  territoire,  il  est  toujours  paye  par  les  biens-fonds.     Ainsi  la  forme 
d'imposition  la  plus  simple,  la  plus  reglee,  la  plus  profitable  a  1'Etat,  et  la  moins 
onereuse  aux  contribuables,  est  celle  qui  est  etablie  proportionnellement  au  produit 
net  et  immediatement  a  la  source  des  richesses  continuellement  renaissantes."  — 
Daire,  pp.  84,  85 ;  Oncken,  p.  339. 

2  Second  Probleme  £conomique  :   determiner  les  Effets  d'un  Impot  Indirect. 
In  Physiocratesy  Daire's  edition,  pp.  127  et  scq.;  in  (Euvres,  Oncken's  edition, 
pp.  697  et  seq. 


ioo          Shifting  and  Incidence  of  Taxation 

for  instance,  are  the  general  property  or  income  tax,  known 
as  the  taille  personnelle,  the  poll  tax,  the  corvee  or  road  tax, 
the  tax  on  house  rent,  and  the  tax  on  funds.  Others  are 
more  complex  and  more  costly  to  collect.  Such  are  the 
taxes  on  products  and  merchandises,  import  and  export 
duties,  internal  tolls,  taxes  on  transportation  and  communi- 
cation, on  sales,  on  offices  and  positions,  on  privileges  and 
franchises.  All  these  taxes  together  form  an  aggregate  that 
may  be  summed  up  under  the  name  of  the  indirect  tax ;  the 
various  expenses  of  collection  and  other  surcharges,  consti- 
tute another  mass  which  may  be  called  the  cost  of  the  indi- 
rect tax}- 

Quesnay  proceeds  to  call  attention  to  the  evil  results  of 
all  these  indirect  taxes.  Following  the  detailed  figures  of 
his  celebrated  Economic  Table?  he  calculates  the  actual 
losses  to  the  community.  If,  for  instance,  instead  of  a 
direct  tax  of  800  millions,  only  300  millions  were  raised  by 
a  land  tax,  and  500  millions  by  indirect  taxes,  Quesnay 
figures  out  that  the  landowners  would  have  to  pay  235  mil- 
lions more,  that  the  government  would  lose  379  millions,  and 
that  wages  would  fall  by  a  sum  of  318  millions,  making  a 

1  "  II  y  a  des  imp8ts  indirects,  simples  et  peu  dispendieux  dans  leur  perception. 
Tels  sont  ceux  qui  s'etabliraient  sur  les  hommes  en  forme  de  taille  personelle,  de 
capitation,  de  corvees,  de  taxes  sur  les  loyers  de  maisons,  sur  les  rentes  pecuniaires, 
etc.     D'autres  sont  fort  composes,  et  entrainent  une  perception  fort  dispendieuse. 
Tels  sont  ceux  qui  seraient  etablis  sur  les  denrees  et  marchandises,  aux  entrees,  aux 
sorties,  aux  peages,  aux  douanes,  ou  sur  les  navigations  et  charrois  du  commerce 
interieur  et  exterieur,  ou  sur  la  circulation  de  1'argent  dans  les  achats  et  dans  les 
ventes  de  toute  espece;  telles  sont  aussi  les  creations  de  charges  et  d'offices,  avec 
attribution  perpetuelle  ou  &  terme  de  droits  et  taxes,  au  profit  de  ceux  qui  en 
seraient  revetus,  les  privileges  de  commerce  exclusif,  etc.  .  .  .  Mais  la  reunion  de 
ces  divers  impots  indirects,  plus  au  moins  onereux,  formant  une  masse  totale  que 
1'on  peut  en  general  appeler  Vimpot  indirect,  la  reunion  des  frais  de  perception  et 
des  autres  surcharges  que  tous  ces  divers  impots  entrainent  a  leur  suite,  presente 
une  autre  masse  que  1'on  peut  appeler  aussi  en  general  les  frais  de  fimpot  indi- 
rect, et  dont  la  quotite,  considered  relativement  k  la  somme  que  le  souverain  retire 
de  la  totalite  des  impots  indirects,  etablit  le  taux  moyen  des  frais  de  perception 
des  impots  de  ce  genre."  —  Daire,  p.  127;  Oncken,  pp.  697,  698. 

2  Le  Tableau  Economique.     This  was  reprinted  by  the  British  Economic  Asso- 
ciation in  1894. 


The  Physiocratic  Theory  101 

total  loss  to  the  community  of  932  millions.  In  addition  to 
this  immense  money  loss,  the  other  resulting  evils  may  be 
summed  up  under  four  heads.  First  in  order  comes  the 
rapid  deterioration  of  the  land,  due  partly  to  the  decrease 
in  agricultural  capital,  partly  to  the  fear  of  employing  new 
machines  or  adopting  new  processes  which  would  be  subject 
to  indirect  taxes,  partly  to  the  ravages  made  in  the  substance 
of  the  cultivators  themselves.  Secondly,  we  notice  the  im- 
mense fortunes  of  the  tax-collectors,  which  impede  the  cir- 
culation of  money  and  its  return  to  agriculture.  Thirdly,  is 
to  be  mentioned  the  residence  of  the  rich  financiers  in  the 
capital,  which  tends  to  separate  consumption  from  the  place 
of  production.  And,  fourthly,  we  must  not  forget  the  mul- 
tiplication of  beggars,  which  is  to  be  directly  ascribed  to 
indirect  taxation ;  for  indirect  taxes,  by  annihilating  a  part 
of  the  annual  reproduction  of  wealth,  destroy  wages  and  the 
means  of  subsistence.  The  increase  of  beggary,  again,  in 
last  resort  means  an  additional  burden  on  the  landowners; 
for  they  dare  not  refuse  alms.1 

Quesnay  is  severe  on  the  landowners  for  not  recognizing 
the  wisdom  of  the  single  tax.  The  tax  seems  to  them  exces- 
sive. Their  ignorant  cupidity  has  never  allowed  them  to  see 
that  taxes  can  really  be  imposed  only  on  the  revenue  of  the 
land.  They  have  always  thought  that  taxes  ought  to  be 
levied  on  men  or  on  the  things  consumed  by  men,  because 
all  men  share  in  the  benefits  of  the  protection  of  government. 
They  have  never  reflected  that  man,  whose  physical  consti- 
tution depends  on  the  satisfaction  of  his  wants,  can  do  noth- 
ing by  himself ;  and  that  all  taxes  imposed  on  men,  or  on  the 
things  they  consume,  are  necessarily  taken  from  the  wealth 
on  which  men  live  and  which  the  land  alone  produces.2 

1  Daire,  pp.  139,  140;  Oncken,  pp.  716,  717. 

2  "  Mais  ce  revenu  public  de  800  millions,  qui  embrasse  directement  les  deux 
septtemes  du  produit  net  du  territoire,  aurait  paru  excessif  aux  proprie"taires  fon- 
ciers.     Leur  cupidite  ignorante  ne  leur  a  jamais  laisse  apercevoir  que  1'impot  ne 
doit  6tre  pris  que  sur  le  revenu  des  terres.     Us  ont  toujours  pense  que  1'impot 
devait  etre  etabli  sur  les  hommes  ou  sur  les  consommations  que  font  les  hommes, 
parce  que  les  hommes  participent  tous  a  la  protection  de  la  puissance  souveraine. 


IO2          Shifting  and  Incidence  of  Taxation 

As  a  result  of  his  whole  discussion,  Quesnay  concludes 
that  no  matter  how  it  is  arranged,  the  productive  class,  the 
landowners  and  the  tax  itself — as  the  first  distributors  of 
the  total  expenses  —  inevitably  pay  the  whole  of  the  indirect 
taxes  levied  on  the  men  they  employ,  or  on  the  goods  and 
commodities  they  consume;  and  each  one  contributes  to  the 
tax  in  proportion  to  his  share  of  the  expenses.1 

Quesnay 's  theories  were  soon  adopted  by  a  number  of  en- 
thusiastic followers.  The  Marquis  of  Mirabeau  devoted  a 
special  book  to  the  subject  of  taxation,  laying  down  the  gen- 
eral principle  that  "taxes  should  be  levied  directly  on  the 
annual  reproduction,"  or  "  on  the  source  of  all  revenue."  2 
In  another  place  he  points  out  that  no  matter  how  the  tax  is 
imposed,  it  must  be  paid  from  the  net  product;  and  unless 
it  is  assessed  directly  on  this  product  we  are  without  base  or 
compass.3  A  few  years  later  another  writer,  Saint  P6ravy, 
devoted  a  separate  work  to  the  study  of  indirect  taxes,  from 
the  same  point  of  view.4 

Mercier  de  la  Riviere,  perhaps  the  clearest  thinker  of  the 
Physiocrats,  took  especial  pains  in  making  this  distinction 

Us  n'ont  nullement  songe  que  1'homme,  dont  la  constitution  physique  ne  presente 
que  des  besoins,  ne  peut  rien  par  lui-mSme;  et  que  toute  imposition  mise  sur  les 
hommes,  ou  sur  leur  consommation,  serait  necessairement  prise  sur  les  richesses 
qui  font  subsister  les  hommes,  et  que  la  terre  seule  produit."  —  Daire,  p.  131; 
Oncken,  p.  704. 

1  "Ainsi,   de   quelque   fa$on  qu'on  s'arrange,  la  classe   productive,  les  pro- 
prietaires  des  terres,  et  1'impot  meme,  comme  premiers  distributeurs  des  depenses 
payent  inevitablement  la  totalite  de  1'imposition  indirecte  que  1'on  etablit  sur  les 
hommes  qu'ils  salarient,  ou  sur  les  denrees  et  marchandises  qu'ils  consomment; 
et  ils  y  contribuent  chacun  a  raison  de  la  distribution  de  ses  depenses."  —  Daire, 
p.  134;  Oncken,  p.  707. 

2  "  L'Imp8t  doit  Stre  etabli  immediatement  sur  la  reproduction  annuelle."  — 
Theorie   de   VImpbt.     [Par  Le  Marquis  de   Mirabeau.]      1760,  p.    123.     "Que 
1'impot  soit  etabli  immediatement  a  la  source  des  revenus." — Ibid.t^.  131.     In 
the  more  common  octavo  edition  of  1761  these  passages  are  found  on  pp.  150 
and  1 60. 

8  "  De  quelque  maniere  que  se  retourne  1'impot  il  est  impossible  qu'il  provienne 
d'autre  part  que  du  produit;  s'il  n'est  pris  directement  sur  le  produit  net  qui 
constitue  le  revenu,  il  n'a  plus  ni  base,  ni  boussole."  —  L'Ami  des  Hommes,  ou 
Traite  de  la  Population,  1757,  tome  vii,  p.  45.  Cf.  pp,  47,  171. 

4  Memoir e  sur  les  Effets  de  Pimpot  Indirect.     Par  Saint  Peravy.     1768. 


The  Physiocratic  Theory  103 

between  direct  and  indirect  taxes  hinge  on  the  question  of 
incidence.  The  essential  form  of  taxation,  he  tells  us,  con- 
sists in  taking  the  tax  directly  where  it  is,  and  in  not  trying^ 
to  take  it  where  it  is  not.  It  is  clear  that  the  funds  destined 
to  the  payment  of  taxes  are  to  be  found  only  in  the  hands 
of  the  landowners,  or  rather  of  the  farmers.  They  receive 
these  funds  from  the  land,  and  when  they  give  them  up  to 
the  king,  they  are  not  really  giving  anything  that  belongs  to 
them.  On  them,  therefore,  we  must  lay  the  tax,  if  we  wish 
to  burden  nobody.  To  change  this  direct  form  of  taxation, 
and  to  give  it  an  indirect  form,  is  to  reverse  the  natural  order, 
from  which  we  cannot  deviate  without  the  greatest  evils. 
Taxation  is  indirect,  when  it  is  levied  on  persons  or  on  com- 
modities. In  both  cases  the  damage  to  the  king  and  to  the 
people  alike  is  enormous  and  inevitable.1 

The  evils  above  referred  to,  he  tells  us  in  another  passage, 
are  inherent  in  the  very  nature  of  indirect  taxes.  The  name 
itself  tells  us  that  the  tax  is  not  borne  by  those  on  whom  it 
seems  to  be  directly  laid  ;  and  that  is  perfectly  true.  Even 
when  it  appears  to  have  nothing  to  do  with  the  landowners, 
it  falls  on  them  —  and  with  considerable  additions;  for  it 
always  costs  them  more  than  the  king  receives.  In  certain 
cases  it  even  causes  them  to  suffer  losses  which  redound  to 

1  "  Ainsi  la  forme  essentielle  de  1'impot  consiste  a  prendre  directement  1'impot 
ou  il  est,  et  a  ne  pas  vouloir  le  prendre  ou  il  n'est  pas.  ...  II  est  evident  que  les 
fonds  qui  appartiennent  a  1'impot  ne  peuvent  se  trouver  que  dans  les  mains  des 
proprietaires  fonciers,  ou  plutot  des  cultivateurs  ou  fermiers  qui,  a  cet  egard,  les 
represented;  ceux-ci  recoivent  ces  fonds  de  la  terre  meTne  et,  lorsqu'ils  les  rendent 
au  souverain,  ils  ne  donnent  rien  de  ce  qui  leur  appartient;  c'est  done  a  eux  qu'il 
faut  demander  1'impot,  pour  qu'il  ne  soit  a  la  charge  de  personne.  Changer  cette 
forme  directe  de  1'etablissement  de  1'impot  pour  lui  donner  une  forme  indirecte, 
c'est  renverser  un  ordre  naturel  dont  on  ne  peut  s'ecarter  sans  les  plus  grands 
inconvenients. 

"La  forme  de  1'impot  est  indirccte  lorsqu'il  est  Stabli  ou  sur  les  personnes 
memes  ou  sur  les  choses  commergables :  dans  1'un  et  1'autre  cas,  les  prejudices 
qu'il  cause  au  souverain  et  a  la  nation  sont  enormes  et  inevitables,  et  ils  sont 
a-peu-pres  les  memes,  quoiqu'ils  ayent  une  marche  et  une  gradation  differ- 
entes."  —  U  Ordre  Naturel  et  Essentiel  des  Societes  Politiques.  [Par  Mercier 
de  la  Riviere.]  Londres,  1767,  chap,  xxx,  p.  243.  In  Daire,  Physiocrates,  it  is 
reprinted  as  chapter  iv,  p.  474. 


IO4          Shifting  and  Incidence  of  Taxation 

no  one's  advantage,  and  it  thus  brings  about  a  progressive 
decrease  in  the  total  quantity  of  wealth.1 

Therefore,  he  concludes,  in  the  essential  order  of  society 
(to  outline  which  his  whole  book  is  written)  taxation  is  en- 
tirely independent.  The  revenue  it  yields  is  the  necessary 
result  of  a  combination  of  causes  which  always  remain  the 
same  and  always  produce  the  same  effects.  But  this  valu- 
able advantage  can  be  retained  only  so  far  as  its  essential 
form  is  not  changed,  and  as  the  king  directly  seizes  the 
portion  that  his  co-ownership  in  the  lands  of  his  dominion 
gives  him  a  right  to  take.2 

The  great  popularizer  of  the  Physiocratic  doctrines,  Du 
Pont  de  Nemours,  who  subsequently  tried  to  impress  his  ideas 
of  incidence  on  the  French  revolutionary  parliament,  put 
the  theory  in  a  little  different  way.3  Taxes,  he  tells  us,  can- 
not be  imposed  indifferently  on  all  kinds  of  wealth.  Nature 
has  not  given  to  that  form  of  wealth  which  is  used  in  agri- 
cultural production  the  power  of  making  any  contribution 
to  taxes.  She  has,  in  fact,  imperiously  subjected  it  to  the 
law  of  being  wholly  consumed  in  keeping  up  the  cultivation 
of  the  land  itself,  on  pain  of  seeing  cultivation,  the  crops,  the 
people,  the  empire  itself  gradually  disappear.  That  portion 

1  "  Les  inconvenients  dont  je  veux  parler  sont  dans  la  nature  mSme  de  Pimpot 
indirect.     Le  nom  qu'on  lui  donne  ici  annonce  qu'il  n'est  point  supporte  par 
ceux  sur  lesquels  il  semble  etre  directement  etabli,  et  cela  est  vrai :  lors  meme  qu'il 
parolt  totalement  etranger  aux  proprietaires  fonciers,  il  retombe  sur  eux,  et  a 
grands  frais,  car  il  leur  coute  toujours  beaucoup  plus  qu'il  ne  rend  au  Souverain;  il 
leur  occasionne  m8me,  en  certains  cas,  des  pertes  seches  dont  personne  ne  profite,  des 
diminutions  progressives  de  la  masse  commune  des  richesses  disponibles,  dans  les- 
quelles  le  Souverain  doit  partager,  et  qui  sont  la  mesure  de  sa  puissance  politique."  — 
L'Ordre  Natural  et  Essentiel  des  Societes  Politiques,  p.  247.    In  Daire's  ed.,  p.  476. 

2  "Ainsi,  dans  1'ordre  essentiel  des  societes,  Pimpot  est  totalement  inde"pendant; 
le  produit  qu'il  donne  annuellement  est  le  fruit  necessaire  d'un  enchatnement  de 
diverses  causes  qui  seront  toujours  les  mSmes,  et  qui  produiront  toujours  les  mSmes 
effets.    Mais  il  ne  peut  conserver  cet  avantage  precieux  qu'autant  qu'on  ne  change 
point  sa  forme  essentielle,  que  le  souverain  prend  directement  la  part  proportion- 
nelle  que  sa  copropriete  lui  donne  droit  de  prendre  dans  les  produits  nets  des 
terres  de  sa  domination." —  Ibid.,  p.  249.     In  Daire's  ed.,  p.  478. 

8  In  his  De  VOrigine  et  des  Pr ogres  d'une  Science  Nouvelle.  [Par  P.  S.  Du 
Pont  du  Nemours.]  Londres,  1768.  In  Daire's  Physiocrates,  p.  335. 


The  Physiocratic  Theory  105 

of  the  crops  which  is  called  the  net  produce  is,  then,  the  only 
part  naturally  subject  to  taxation.1 

The  aim  of  taxation,  Du  Pont  tells  us  in  another  place,  is  * 
the  preservation  of  the  rights  of  property  and  of  liberty  in  V 
their  original  and  natural  extent.     All  kinds  of  taxes  which  / 
curtail  liberty  and  property,  and  which  therefore  necessarily  \ 
diminish  wealth  and  population,  would  thus  be  clearly  con-  \ 
trary  to  the  aim  of  taxation.    If  duties  were  levied  on  persons, 
on  commodities,  on  expense,  or  on  consumption,  their  collec- 
tion would  be  costly,  their  existence  would  impede  the  liberty 
of  human  effort,  and  they  would  necessarily  increase  the  ex- 
penses of  commerce  and  agriculture.2 

Coming,  then,  more  specifically  to  the  problem  of  shifting, 
Du  Pont  contends  that  when  an  indirect  route  is  taken  in  the 
assessment  of  a  tax,  it  is  none  the  less  paid,  in  last  analysis, 
by  the  net  produce  of  land.  But  it  is  then  extremely  disas- 
trous and  much  more  burdensome  to  the  landowners.  It  cur- 
tails liberty  and  restrains  property;  it  lowers  the  price  of 
produce  in  the  hands  of  the  producer ;  it  decreases  the  mass 
of  products,  and  still  more  the  sum  of  national  revenues ;  it 
leads  to  misery  and  depopulation;  it  ruins  by  degrees  the 

1  "  L'impot  ne  saurait  mSme  porter  indifferemment  sur  toutes  les  richesses 
renaissantes.     La  nature  a  refuse  a  celles  qu'on  appelle  reprises  des  cultivateurs 
la  faculte  de  contribuer  a  I'imp&t,  puisqu'elle  leur  a  imperieusement  impose  la  loi 
d'8tre  employees  en  entier  a  entretenir  et  a  perpetuer  la  culture,  sous  peine  de 
voir  aneantir  par  degres  la  culture,  les  recoltes,  la  population,  les  empires. 

"  La  portion  des  recoltes  nominee  le  produit  net,  est  done  la  seule  contribuable 
a  1'impot,  la  seule  que  la  nature  ait  rendue  propre  a  y  subvenir. 

"  II  est  done  de  V essence  de  1'impot  d'Stre  une  portion  du  produit  net  de  la 
culture."  —  Ibid.,  p.  35 1. 

2  "  Le  but  de  1'impot  est  la  conservation  du  droit  de  propriete  et  de  la  liberte 
de  1'homme  dans  toute  leur  etendue  naturelle  et  primitive  ;  conservation  qui  peut 
seule  assurer  la  multiplication  des  richesses  et  de  la  population. 

"Toute  forme  d'imposition  qui  restreindrait  la  propriete  et  la  liberte  de  rhomme, 
et  qui  diminuerait  necessairement  les  richesses  et  la  population,  serait  done  mani- 
festement  opposee  au  but  de  I'imp8t. 

"  Si  1'on  etablissait  des  impositions  sur  les  personnes,  sur  les  marchandises,  sur 
les  depenses,  sur  les  consommations,  la  perception  de  ces  impositions  serait  fort 
couteuse  ;  leur  existence  gSnerait  la  liberte  des  travaux  humains,  et  augmenterait 
necessairement  les  frais  de  commerce  et  de  culture."  —  Ibid.,  pp.  351,  352. 


io6          Shifting  and  Incidence  of  Taxation 

soil,  the  farmers,  the  landowners,  the  nation  and  the  king.1 
It  is  no  wonder  that,  holding  such  views,  the  Physiocrats 
summed  up  their  theory  of  taxation  in  the  famous  phrase : 
Indirect  taxes,  poor  peasants ;  poor  peasants,  poor  kingdom ; 
poor  kingdom,  poor  king.2 

The  Abbe  Baudeau  develops  the  same  line  of  thought. 
Instead  of  the  net  produce,  he  speaks  of  "  the  clear  and  liquid 
annual  revenue  of  land,"  which  he  thinks  is  so  simple  an  idea 
that  it  is  self-evident.3  Baudeau  emphasizes  the  fact  already 
alluded  to  by  Quesnay,  and  subsequently  worked  out  more 
lucidly  by  Turgot  —  namely,  that  a  part  of  this  "clear  reve- 
nue" must  really  be  regarded  as  belonging  not  to  the  owner 
but  to  the  king ;  and  that  therefore,  when  a  man  buys  a  piece 
of  land,  he  buys  not  the  whole  of  its  revenue,  but  only  that 
part  which  is  not  due  to  government.  The  payment  due  to 
the  king  by  virtue  of  his  right  of  sovereignty  is,  therefore, 
not  really  a  tax  at  all ;  it  is  not,  as  many  people  say  of  taxa- 
tion in  general,  a  sacrifice  which  each  citizen  makes  of  a  part 
of  his  property  in  order  to  keep  the  rest.4 

1  "  Nous  venons  de  voir  que  lorsqu'on  veut  prendre  une  route  indirecte  pour 
lever  I'impSt,  il  n'en  est  pas  moins  paye,  en  derniere  analyse,  par  le  produit  net 
des  biens-fonds;  mais  qu'il  1'est  alors  d'une  maniere  extremement  desastreuse  et 
beaucoup  plus  onereuse  pour  les  proprie*taires  fonciers;  qu'il  g8ne  la  liberte  et 
restreint  la  propriete  des  citoyens;  qu'il  fait  baisser  le  prix  des  productions,  a  la 
vente  de  la  premiere  main;  qu'il  diminue  la  masse  des  produits,  et  encore  plus  la 
somme  des  revenus  du  territoire;  qu'il  amene  la  misere  et  la  depopulation;  qu'il 
ruine  par  degres  la  culture,  les  cultivateurs,  les  proprietaires  fonciers,  la  nation  et 
le  souverain."  —  De  V  Origins  et  des  Pr ogres  d'une  Science  Nouvelle,  p.  354. 

2  "  Impositions  indirectes;    pauvres  paysans.     Pauvres  paysans;  pauvre  roy- 
aume.     Pauvre  royaume;  pauvre  roi."  —  Ibid.,  p.  354. 

8  "  Vouloir  connaitre  le  revenu  clair  et  liquide  annuel  de  chaque  terre  par  esti- 
mation commune  de  son  etat  habituel,  c'est  done  chercher  une  chose  toute  trou- 
vee."  —  Premiere  Introduction  &  la  Philosophic  £conomiquet  ou  Analyse  des  £tats 
Polices.  [Par  Nicolas  Baudeau.]  1771.  In  Daire's  Physiocratcs,  p.  767.  Similar 
ideas  may  be  found  in  Baudeau's  earlier  work,  Lettres  d'un  Citoyen  a  un  Magis- 
trat  sur  les  Vingtiemes  et  les  autres  Impots.  1768. 

4  "Tout  proprietaire  saurait  qu'il  n'acquiert  pour  ses  heritiers,  pour  ses  ces- 
sionnaires  ou  ayant-cause,  que  quatorze  vingtiemes,  ou  un  peu  plus  de  deux  tiers, 
du  produit  net  annuel  d'un  fonds  mis  en  exploitation;  que  le  reste  n'est  pas  a  lui, 
mais  a  la  souverainete. 

"  II  sait  que  le  droit  de  la  souverainete,  sur  un  peu  moins  du  tiers  des  revenus 


The  Physiocratic  Theory  107 

The  specific  question  of  the  incidence  of  export  and  im- 
port duties,  as  well  as  of  taxes  on  communication  and  trans- 
portation in  general,  was  treated  at  considerable  length  by 
another  of  the  Physiocrats,  Le  Trosne.  Most  of  what  he 
says  deserves  careful  attention  even  to-day,  especially  when 
he  discusses  the  conditions  under  which  a  part  of  the  export 
or  import  duties  is  supposed  to  rest  finally  on  the  foreign 
country.1  But  these  are  points  of  detail,  the  consideration  of 
which  would  lead  us  too  far  astray  in  this  place. 

The  most  cautious  as  well  as  the  greatest  of  the  Physio- 
crats was  Turgot.  In  discussing  the  question  of  the  real 
incidence  of  the  land  tax,  Turgot  expounds  very  clearly  what 
came  to  be  known  subsequently  as  the  capitalization  theory. 
If  land  alone  were  subject  to  taxation,  says  he,  once  the  tax 
was  settled,  the  capitalist  purchaser  would  not  count  in  the 
interest  of  his  money  the  part  devoted  to  the  payment  of  the 
tax  —  just  as  a  man  who  to-day  buys  a  piece  of  land  does  not 
buy  the  tithe  which  the  priest  receives  or  the  land  tax,  but 
buys  only  the  income  which  remains  after  deducting  the 
tithe  and  the  tax.2 

territoriaux  clairs  et  liquides,  est  fonde,  comme  tout  droit  juste  et  raisonnable,  sur 
des  avances  faites,  sur  des  travaux  accomplis  ci-devant,  et  encore  sur  les  mSmes 
avances,  les  mSmes  travaux  a  continuer;  sur  leur  efficacite,  productive  de  ces 
m8mes  revenus,  dont  ils  sont  une  cause  efficiente,  une  des  conditions  indispensa- 
bles  sans  lesquelles  il  n'existerait  point  un  tel  produit  net. 

"  Cette  perception,  ainsi  reglee,  n'a  done  point  les  caracteres  de  ce  qu'on  appelle 
impot;  ce  n'est  point,  comme  on  le  dit  avec  quelque  apparence  de  raison  dans  les 
Etats  mal  administres,  un  sacrifice  que  chacun  fait,  d'une  portion  de  sa  propriete, 
pour  conserver  le  reste."  —  Daire's  Physiocratcs,  pp.  762,  763. 

1  De  V  Inter  et  Social,  par  rapport  a  la  Valeur,  a  la  Circulation,  a  V  Industrie 
et  au  Commerce  Interieur  et  Exterieur.     Par  Guillaume-Francois  Le  Trosne. 
1777.     In  Daire's  Physiocrates,  esp.  pp.  988-1007. 

2  "  Je  reponds,  en  second  lieu  que,  si  les  terres  etaient  chargees  seules  de  la 
contribution  aux  depenses  publiques,  des  qu'une  fois  cette  contribution  serait 
reglee,  le  capitaliste  qui  les  acheterait  ne  compterait  pas  dans  I'intergt  de  son 
argent  la  partie  du  revenu  affectee  a  cette  contribution  ;   de  m8me  qu'on  homme 
qui  achete  aujourd'hui  une  terre  n'achete  pas  la  dime  que  re?oit  le  cure,  ni  meTne 
1'impot  connu,  mais  le  revenu  qui  reste,  deduction  faite  de  cette  dime  et  cet 
impot."  —  Reflexions  sur  la  Formation  et  la  Distribution  des  Richesses,  §  97.    Cf. 
his  Comparaison  de  P  Impot  direct  et  de  r Impot  indirect,  in  (Euvres  de  Turgot, 
edited  by  Daire.     Paris,  1844,  i,  p.  413. 


io8          Shifting  and  Incidence  of  Taxation 

In  an  early  memoir,  written  in  1764,  Turgot  maintains  that 
all  taxes  must  be  paid  out  of  income.  He  then  proceeds  to  a 
discussion  of  income  in  general,  in  the  course  of  which  he 
elaborates  the  doctrine  of  the  produit  net  which  alone  con- 
stitutes the  real  social  revenue,  disposable  for  purposes  of 
taxation.  The  landowner,  says  he,  is  the  only  one  who  has 
a  real  income : l  every  other  conception  of  income  is  illu- 
sory.2 It  follows,  therefore,  that  all  taxes,  howsoever  levied, 
are  ultimately  paid  from  this  income. 

This  leads  Turgot  to  distinguish  between  direct  and  indi- 
rect taxes.  In  a  later  memoir,  he  gives  a  formal  definition 
of  these  terms.  The  tax  which  the  landowner  pays  immedi- 
ately out  of  his  income,  he  tells  us,  is  called  a  direct  tax ;  the 
tax  which  is  not  directly  assessed  on  the  income  is  called  an 
indirect  tax.  Indirect  taxes  may  be  reduced  to  three  chief 
classes :  the  tax  on  the  tenant  farmer,  the  tax  on  the  profits 
of  capital  or  industry,  and  the  tax  on  commodities  sold  or 
consumed.  The  landowner,  however,  bears  the  burden  of 
the  indirect  tax  in  two  ways :  through  an  increase  of  his 
expenses,  and  through  a  decrease  of  his  income.3  The  term 

1  "Le  proprietaire  de  fonds  est  le  seul  qui  ait  un  veritable  revenu." — Plan 
d'un  Memoire  sur  Us  Impositions  en  General,  etc.,  in  QZuvres  de   Turgot,  i, 
p.  400. 

2  "  Tout  autre  idee  de  revenu  est  illusoire.    Lorsqu'on  achete  un  bien-fonds, 
c'est  ce  revenu  seul  qu'on  achete."  —  Ibid.,  p.  402. 

8  "  L'impot  que  le  proprietaire  paye  immediatement  sur  son  revenu  est  appele 
impbt  direct.  L'impot  qui  n'est  point  assis  directement  sur  le  revenu  du  proprie- 
taire, mais  qui  porte  ou  sur  les  frais  productifs  du  revenu,  ou  sur  les  depenses  de 
ce  revenu,  est  appele  impbt  indirect. 

"  L'impot  indirect,  malgre  la  variete  des  formes  dont  il  est  susceptible,  peut  se 
reduire  a  trois  classes : 

"  L'impot  sur  les  cultivateurs;  — 1'impot  sur  les  profits  de  1'argent  ou  de  Pindus- 
trie;  — 1'impot  sur  les  merchandises  passantes,  vendues  ou  consommees. 

"  Ces  trois  classes,  et  les  differentes  formes  d'impositions  dans  lesquelles  elles  se 
subdivisent,  peuvent  retomber  sur  les  proprietaires  par  un  circuit  plus  ou  moins 
long,  et  d'une  maniere  plus  ou  moins  onereuse. 

"  Les  proprietaires  payent  1'impot  indirect  de  deux  facons,  en  augmentation  de 
depense  et  en  diminution  de  revenu." — Explications  sur  le  Sujet  du  Prix  offert 
par  la  Societe  Royale  de  V Agriculture  de  Limoges  au  Memoire  dans  lequel  on 
aurait  le  mieux  demontre  PEffet  de  P  Impbt  Indirect  sur  le  Revenu  des  Proprie- 
taires de  Bien-Fonds ;  in  CEuvres  de  Turgot,  i,  pp.  416,  417. 


The  Physiocratic  Theory  109 

"indirect  tax,"  therefore,  covers  every  tax  except  a  direct 
tax  on  the  net  revenue  of  land.1 

In  another  place,  Turgot  tries  to  meet  the  objection  of 
those  who  maintained  that  wealth  in  general  is  the  source  of 
taxation.  It  is  not  all  real  wealth,  he  tells  us,  that  can  pay 
taxes.  To  serve  this  purpose,  wealth  must  be  disposable,  — 
that  is,  it  must  not  be  needed  for  the  reproduction  of  the 
following  year,  directly  or  indirectly.  All  wealth  may  indeed 
be  taken  by  main  force ;  but  no  wealth  necessary  to  the  work 
of  reproduction  can  be  diverted  from  this  end  without  injury 
to  the  national  wealth,  and  consequently  to  the  power  of  the 
government.  In  the  recognition  of  this  principle  consists  the 
whole  theory  of  taxation.2 

Finally,  in  a  memoir  said  to  have  been  written  for  Ben- 
jamin Franklin,  Turgot  develops  more  fully  his  theories  of 
the  shifting  of  all  indirect  taxes  to  the  landowner.3  Yet,  not- 
withstanding his  theories,  Turgot,  while  at  the  head  of  the 
treasury,  made  no  attempt,  as  is  sometimes  asserted,  to  put 
the  plan  of  the  single  tax  into  actual  operation.  He  was  too 
great  a  statesman  to  commit  himself  to  any  such  hazardous 
scheme. 

The  Physiocrats,  it  may  be  remarked  in  passing,  exercised  a 
perceptible  influence  on  contemporary  American  thought.  In 

1  Elsewhere,  however,  Turgot  also  classes  a  poll  tax  as  a  direct  tax.    But  if  the 
poll  tax  be  graded  so  as  to  reach  the  "  faculties,  industry,  profits  or  wages,"  it 
must  be  called  an  indirect  tax.  —  Ibid.,  i,  p.  396. 

2  "  Ce  n'est  pas  toute  richesse  reelle,  comme  le  croit  1'auteur,  qui  peut  payer 
I'impdt;    il  faut  encore  qu'elle  soit  disponible,  c'est-a-dire  qu'elle  ne  soit  pas 
necessaire  a  la  reproduction  de  1'annee  suivante,  soit  immediatement,  soit  mediate- 
ment.     Toute  richesse  necessaire  aux  travaux  de  la  reproduction  n'en  peut  etre 
detournee  sans  nuire  a  cette  reproduction,  a  la  richesse  nationale,  et  par  suite  aux 
moyens  de  puissance  du  gouvernement.     Voila  toute  la  theorie  de  I'impSt."     In 
Observations  sur  le  Memoire  de  M.  Graslin  en  faveur  de  flmpot  Indirect.  — 
(Euvres,  i,  pp.  434,  435. 

3  Comparaison  de  I  'Impot  sur  le  Revenu  des  Proprietaires  et  I  'Impot  sur  les 
Consomntations.  —  (Euvres,  ii,  p.  409.     Du  Pont  de  Nemours  says  that  this  was 
written  to  dissuade  Hamilton,  then  Secretary  of  the  Treasury,  from  adopting  his 
scheme  of  indirect  taxes.     But  as  Turgot  had  been  dead  several  years  before 
Hamilton  formulated  his  scheme,  this  is  clearly  impossible.     Yet  the  statement 
that  the  memoir  was  originally  written  for  Franklin  may  be  true. 


no          Shifting  and  Incidence  of  Taxation 

a  number  of  the  writings  of  the  foremost  American  statesmen 
there  are  continual  references  to  the  doctrines  of  the  "  Econ- 
omists." Benjamin  Franklin,  for  instance,  carried  on  an 
extended  correspondence  with  the  Abbe  Morellet  and  with 
Le  Veillard.  In  one  of  his  later  letters,  he  refers  to  the  doc- 
trine as  among  the  principles  of  economics  which  he  origi- 
nally shared ;  but  his  great  practical  sense  convinced  him  of 
the  futility  of  the  attempt  to  apply  the  scheme  in  America.1 
Alexander  Hamilton  also  seems,  in  one  of  the  essays  in  the 
Continentalist,  to  have  shared  the  opinions  of  the  Physio- 
crats.2 A  careful  reading  of  the  context,  however,  shows  that 
Hamilton  did  not  advocate  any  scheme  for  a  single  tax  on 
land.  In  fact,  he  adds  in  another  place  that  "  particular 
caution  ought  at  present  to  be  observed  in  this  country,  not 
to  burden  the  soil  itself  and  its  productions  with  heavy 
impositions." 

An  eminent  French  writer,  M.  Leroy-Beaulieu,  has  fallen 
into  a  curious  error.  The  Physiocrats,  according  to  him, 
held  that,  even  if  the  single  tax  were  imposed,  the  landowners 
would  lose  nothing  because  their  products  would  rise  in  price 
and  would  thus  reimburse  the  proprietors  for  their  original 
outlay.3  This,  however,  is  a  mistake.  The  cardinal  doctrine 
of  the  Physiocrats  was  that  all  taxes  fall  ultimately  on  the 

1  "  I  have  not  lost  any  of  the  principles  of  public  economy  you  once  knew 
me  possessed  of.  ...     Our  legislators  are   all  landowners,  and  they   are   not 
yet  persuaded  that  all  taxes  are  paid  by  the  land." — Letter  to  Mr.  Small,  1787. 
In  The  Complete  Works  of  Benjamin  Franklin,  edited  by  John  Bigelow.    New 
York,  1887,  ix,  p.  414. 

2  "  Many  theorists  in  Political  Economy  have  held,  that  all  taxes,  wherever 
they  originate,  fall  upon  land,  and  have  therefore  been  of  the  opinion  that  it 
would  be  best  to  draw  the  whole  revenue  of  the  state  immediately  from  that 
source.  .  .  .     But  though  it  has  been  demonstrated  that  this  theory  has  been 
carried  to  an  extreme,  impracticable  in  fact,  yet  it  is  evident,  in  tracing  the  matter, 
that  a  large  part  of  all  taxes,  however  remotely  laid,  will,  by  an  insensible  cir- 
culation, come  at  last  to  settle  upon  land  —  the  source  of  most  of  the  materials 
employed   in   commerce." — The  Continentalist,  vi,    1782.     In   The   Works  of 
Alexander  Hamilton,  edited  by  Henry  Cabot  Lodge.     New  York,  1885,  i,  p. 
266. 

8  Science  des  Finances.  Par  Paul  Leroy-Beaulieu.  Paris,  1892,  5th  ed.,  i, 
p.  199. 


The  Physiocratic  Theory  in 

landowners,  and  on  them  alone.1  It  was  just  because  the 
Physiocrats  supposed  that  the  tax  could  not  be  shifted  that 
they  advocated  the  single  tax.  The  landowners  would,  in- 
deed, in  their  opinion,  suffer  less  from  a  direct  tax  than  from 
an  indirect  tax ;  for  not  only  would  the  indirect  taxes  yield  so 
little,  relatively,  that  higher  rates  would  be  necessary,  but 
they  would  tend  to  destroy  the  foundations  on  which  the 
prosperity  of  the  landowners  rested.  But  the  direct  tax, 
even  though  less  destructive,  would  still  remain  on  those 
on  whom  it  was  originally  imposed  —  the  owners  of  the 
soil. 

The  Physiocratic  doctrine  of  incidence  does  not  need  any 
formal  refutation.  Resting  on  the  peculiar  doctrine  of  the 
sole  productivity  of  agriculture,  it  has  been  convicted  of 
exaggeration  and  unreality.2  The  Physiocrats'  theory  of  dis- 
tribution and  their  conception  of  natural  law  may  be  said  to 
have  ushered  in  the  modern  period  of  economic  science. 
But  Adam  Smith,  who  was  in  these  respects  so  profoundly 
influenced  by  the  Physiocrats,  shattered  the  very  foundations 
on  which  their  third  fundamental  doctrine  —  that  of  the  pro- 
duit  net  —  was  based.  If  the  Physiocrats  developed  what 

1  "  Tout  imp6t  est  paye  par  le  produit  des  terres,  tout  ce  que  I'imp8t  prend  sur 
ce  produit,  apres  les  partage  fait  par  le  souverain,  forme  un  double  emploi;  tout 
double  emploi  retombe  sur  les  proprietaires  fanciers." —  L?  Ordre  Naturel,  etc. 
Par  Mercier  de  la  Riviere,  chap,  vii  (p.  504  of  Daire's  ed.).     "Tous  les  impots 
sous  quelque  forme  qu'ils  soient  percus  retombent  necessairement  k  la  charge  des 
proprietaires  des  biens  fonds,  et  sont  toujours  en  dernier e  analyse  payes  par  eux 
seuls,  ou  directement,  ou  indirectement."  —  Explications  sur  fejfet  de  I"1  Impbt 
Indirect,  in  CEuvres  de  Turgot  (Daire's  ed.)  i,  416. 

2  A  good  exposition  of  its' weakness  is  made  by  Arthur  Young  in  his  Political 
Arithmetic,  1774,  pp.  208-266.    The  best  contemporary  French  refutation  is  con- 
tained in  Essai  Analytique  sur  la  Richesse  et  sur  V Impbt,  ou  Von  refute  la  nou- 
velle  doctrine  economique  .  .  .  sur  I'effet  des  Impots  indirects.     Par  Louis  Frangois 
de  Graslin.     Londres,  1767.     Graslin  not  only  denies  that  the  so-called  indirect 
taxes  are  shifted  to  land,  but  contends  that  a  tax  imposed  directly  on  land  is  some- 
times shifted  to  the  consumer.  —  Ibid.,  pp.  230  et  al.     Another  work  very  widely 
read  at  the  time  was  the  anonymous  volume  written  to  answer  Mirabeau's  book 
on  taxation,  under  the  title  Doutes  proposes  a  VAuteur  de  la  Theorie  de  V Impbt. 
1761.     See  especially  pp.  24-48,  "Sur  quoi  doit-on  preferablement  fake  porter 
les  impositions  ?  " 


H2          Shifting  and  Incidence  of  Taxation 

might  be  called  the  agricultural  system  of  economics,  Adam 
Smith  is  responsible  for  the  industrial  system.  Yet  their 
theories  of  the  incidence  of  taxation,  apart  from  the  peculiar 
doctrine  of  the  produit  net,  are  not  so  dissimilar  as  might  be 
imagined. 


CHAPTER  II 
THE  ABSOLUTE  THEORY 

ON  the  subject  of  the  incidence  of  taxation,  as  on  almost 
every  topic  of  economic  inquiry,  modern  views  are  commonly 
traced  back  to  the  works  of  Adam  Smith  and  Ricardo.  For 
reasons  that  will  soon  appear,  the  doctrines  advanced  by 
these  great  thinkers  may  be  summed  up  under  the  name  of 
the  absolute  theory  of  incidence. 

Adam  Smith  bases  his  investigation  on  the  division  of  all 
revenue  into  rent,  profits  and  wages.  All  taxes  on  land, 
says  he,  whether  proportional  to  the  rent  or  to  the  whole 
produce,  are  in  reality  taxes  on  rent.  Although  they  may 
be  originally  advanced  by  the  tenant,  they  are  finally  paid 
by  the  landlord.  A  tax  on  land  rent  necessarily  falls  on 
the  owner ;  for  the  "  farmer  computes,  as  well  as  he  can, 
what  the  value  of  the  (tax)  is,  one  year  with  another,  likely 
to  amount  to,  and  he  makes  a  proportionable  abatement  in 
the  rent  which  he  agrees  to  pay  to  the  landlord."  The 
farmer  must  have  his  reasonable  profit  as  well  as  every  other 
dealer.  Hence  "  the  more  he  is  obliged  to  pay  in  the  way 
of  tax,  the  less  he  can  afford  to  pay  in  the  way  of  rent."  l 
The  case  of  a  tax  on  house  rent  is  slightly  different,  because 
house  rent  is  really  distinguishable  into  two  separate  ingre- 
dients —  building  rent  and  ground  rent.  The  tax  on  ground 
rent,  like  that  on  the  rent  of  land,  will  inevitably  fall  on  the 
owner,  because  "  the  more  the  inhabitant  was  obliged  to  pay 
for  the  tax,  the  less  he  would  incline  to  pay  for  the  ground."  2 

1  An  Inquiry  into  the  Nature  and  Causes  of  the  Wealth  of  Nations.     By 
Adam  Smith,  LL.D.     London,  1776,  book  v,  chap.  ii.    Vol.  ii,  pp.  417, 428.     The 
quotations  are  from  the  edition  of  James  E.  Thorold  Rogers,  2d  ed.,  Oxford,  1880. 

2  Ibid.,  ii,  pp.  437,  440. 

I  113 


H4          Shifting  and  Incidence  of  Taxation 

But  that  part  of  the  rent  which  represents  the  building  rent 
is  simply  the  profits  of  the  capital  expended  in  building  the 
house.  This  part  of  the  tax  will  necessarily  fall  on  the  oc- 
cupier ;  because,  unless  the  builder  secures  the  same  return 
on  his  capital  as  other  business  men  do,  he  will  cease  build- 
ing houses  until  the  increased  demand  for  houses  again 
raises  the  rent  —  that  is,  in  this  case,  his  profits  —  to  the 
general  level.  A  tax  on  house  rent  will  therefore  fall  partly 
on  the  owner  and  partly  on  the  occupier,  but  "  in  what  pro- 
portion this  final  payment  would  be  divided  between  them, 
it  is  not  perhaps  very  easy  to  ascertain." 1 

Taxes  on  profits  are  simple  of  analysis.  The  profit  arising 
from  stock  is  divided  by  Adam  Smith  into  two  parts,  that 
which  pays  the  interest,  and  the  surplus  over  and  above  the 
interest.  A  tax  on  the  surplus  above  interest  is  always 
shifted,  for  this  surplus  is  the  "compensation  for  the  risk 
and  trouble  of  employing  the  stock"  which  the  employer 
must  have  if  he  desires  to  continue  the  employment.  It  will 
be  shifted  either  to  the  landowner  or  to  the  consumer,  ac- 
cording as  the  stock  is  employed  in  farming  or  in  mercantile 
business.2  For  if  he  employed  it  as  "farming  stock,"  he 
could  raise  the  rate  of  his  profit  only  by  reducing  the 
amount  he  is  called  upon  to  pay  to  the  landlord,  —  that  is, 
the  rent.  But  if  he  employed  it  as  a  "  mercantile  or  manu- 
facturing stock,"  he  could  raise  the  rate  of  profit  only  by 
raising  the  price  of  his  goods. 

A  tax  on  interest  —  that  is,  on  what  Smith  regards  as  "the 
net  produce  which  remains  after  completely  compensating 
the  whole  risk  and  trouble  of  employing  the  stock  "  —  seems 
to  fall  entirely  on  the  owner,  just  as  in  the  case  of  a  tax  on 
rent.  But  in  reality  the  interest  on  money  is  a  much  less 
proper  subject  of  direct  taxation  than  rent,  because  land  is 
tangible  and  easily  ascertainable,  while  capital  is  not;  and 
because  land  cannot  be  removed,  while  stock  easily  may  be. 
To  tax  stock,  therefore,  would  cause  its  removal  from  the 

1  An  Inquiry  into  the  Nature  and  Causes  of  the  Wealth  of  Nations,  ii,  p.  434. 

2  Ibid.,  ii,  p.  441. 


The  Absolute  Theory  115 

country,  and  put  an  end  to  all  the  industry  which  it  had 
maintained.  This  would  reduce  not  only  the  profits  of 
stock,  but  also  the  rent  of  land  and  the  wages  of  labor.  A 
general  tax  on  profits,  therefore,  affects  other  classes  besides 
the  employer.1  A  tax  on  the  profits  of  stock  employed  in 
any  particular  branch  of  trade  will,  however,  be  shifted 
from  the  dealers  to  the  consumers  because  the  dealers 
must  "in  all  ordinary  cases  have  their  reasonable  profit." 
The  consumers  will  have  to  pay,  in  the  enhanced  price  of 
their  goods,  not  only  the  tax  advanced  by  the  dealer,  but 
generally  some  overcharge  in  addition.2 

Taxes  on  wages,  finally,  are  always  shifted.  This  is  due 
to  the  fact  that  the  rate  of  wages  is  regulated  by  the  demand 
for  labor  and  by  the  average  price  of  food.  When  these 
remain  the  same,  a  direct  tax  on  wages  "can  have  no  other 
effect  than  to  raise  them  somewhat  higher  than  the  tax."  If 
the  laborers  were  engaged  in  "manufacturing  labor,"  the 
employer  would  have  to  raise  wages,  but  would  ultimately  be 
obliged  to  charge  the  increase  with  a  profit  on  the  consumers. 
If  the  laborers  were  engaged  in  husbandry,  the  farmer  would 
in  the  long  run  pay  less  rent  to  the  landlord.  But  both  the 
reduction  of  the  rent  and  the  rise  of  price  will  be  greater 
than  the  amount  of  the  tax.3  Whenever  taxes  on  labor  have 
not  produced  a  proportionate  rise  in  wages,  it  is  because  they 
have  led  to  a  fall  in  the  demand  for  labor.  The  only  results 
of  this,  however,  have  been  a  "declension  of  industry,  a 
decrease  of  employment,  and  a  diminution  of  the  annual 
produce  of  the  land  and  labor  of  the  country."  Even  then, 
wages  must  always  be  higher  than  they  would  otherwise  have 
been,  and  this  increase  of  price  must  be  finally  paid  by  the 
consumers.  The  same  argument  holds  good  of  the  "  recom- 
pense of  ingenious  artists  and  of  men  of  liberal  professions  "  ; 
but  it  does  not  apply  so  completely  to  "  the  emoluments  of 

1  "The  proprietor  of  stock  is  properly  a  citizen  of  the  world  and  is  not  neces- 
sarily attached  to  any  particular  country."  —  Ibid.,  ii,  p.  443. 

2  Ibid.,  ii,  p.  446. 

3  Ibid.,  ii,  p.  461. 


n6          Shifting  and  Incidence  of  Taxation 

offices,"  because  these  are  not  regulated  by  the  free  competi- 
tion of  the  market. 

Finally,  Adam  Smith  discusses  taxes  which  are  intended 
to  "fall  indifferently  on  every  species  of  revenue."  These 
are  capitation  taxes  and  taxes  on  consumable  commodities. 
Capitation  taxes,  so  far  as  they  are  levied  on  the  lower  classes, 
are  taxes  on  wages,  and  subject  to  the  same  objections  as 
those  taxes,  —  that  is,  they  are  shifted  to  the  consumers.1 
Taxes  on  commodities  are  levied  either  on  necessaries  or  on 
luxuries.  Taxes  on  necessaries  raise  the  rate  of  wages  (be- 
cause wages  are  fixed  partly  by  the  price  of  necessaries)  and 
fall  on  the  consumers  or  landlords.  They  act  precisely  like 
taxes  on  labor.  Taxes  on  luxuries,  on  the  other  hand,  will 
not  raise  wages,  but  will  fall  only  on  the  consumers  of  the 
particular  commodities.  So  far  as  the  poor  are  concerned, 
they  act  simply  as  sumptuary  laws.  It  is,  therefore,  always 
to  the  interest  of  the  richer  classes  to  oppose  taxes  on  neces- 
saries; for  all  taxes  on  necessaries  are  ultimately  paid  by 
them,  while  taxes  on  luxuries  fall  on  them  only  to  the  extent 
that  they  are  consumers  of  luxuries.2 

If  we  sum  up  Adam  Smith's  doctrine  of  incidence,  we  see 
that  taxes  on  wages,  taxes  on  profits  (except  the  tax  on  inter- 
est), and  taxes  on  necessaries  are  always  shifted.  On  the 
other  hand,  taxes  on  land  and  taxes  on  luxuries  always  stay 
where  they  are  put.  The  classes  of  society  who  bear  all  the 
taxes  are  thus  primarily  the  landowners,  the  rich  consumers 
and,  to  a  certain  extent,  the  lenders  of  capital. 

Adam  Smith's  exposition,  marked  as  it  is  by  many  pro- 
found and  suggestive  ideas,  is  entirely  dependent  upon  his 
theories  of  rent,  profits  and  wages.  As  soon  as  we  question 
the  validity  of  his  theory  of  rent,  of  his  treatment  of  wages 
as  based  on  the  necessaries  of  life,  or  of  his  conception  of 
ordinary  profits,  a  large  part  of  his  doctrine  of  incidence  falls 
to  the  ground.  Modern  economic  theory  no  longer  accepts 
these  bases  of  his  theory.  Ricardo  himself  did  much  to  over- 

1  An  Inquiry  into  the  Nature  and  Causes  of  the  Wealth  of  Nations,  ii,  p.  466. 

2  Ibid.,  ii,  p.  470. 


The  Absolute   Theory  117 

throw  them.  But  so  far  as  Adam  Smith  based  his  doctrine 
of  incidence  on  the  theory  of  free  competition  without  any 
qualifications,  and  on  the  inevitable  action  of  simple  economic 
causes,  he  may  be  termed  in  a  certain  sense  the  forerunner 
of  the  absolute  theory  of  incidence. 

Ricardo's  Principles  of  Political  Economy  and  Taxation  is 
largely  devoted  to  the  latter  subject.  With  his  accustomed 
penetration,  Ricardo  went  at  once  to  the  core  of  tax  problems, 
so  that  his  work  consists  almost  exclusively  of  an  investiga- 
tion of  the  problem  of  incidence.  His  discussion  of  this  topic 
discloses  the  same  merits  and  the  same  defects  which  are  so 
characteristic  of  his  other  work.  On  the  one  hand,  profound 
and  acute  analysis,  marvellous  power  of  isolating  the  phe- 
nomena and  treating  them  as  unaffected  by  disturbing  causes ; 
on  the  other  hand,  the  implication  that  the  hypothetical  case 
is  the  real  one,  the  inference  that  the  formulae  deduced  with 
mathematical  accuracy  and  logical  rigor  from  the  assumed 
premises  represent  the  actual  economic  facts  ;  —  these  char- 
acteristics constitute  at  once  the  strength  and  the  weakness 
of  the  Ricardian  theories. 

Ricardo,  like  Adam  Smith,  does  not  give  any  general  theory 
of  incidence.  In  both  cases  we  must  seek  for  the  general 
principles  of  the  authors  in  the  discussions  of  separate  taxes. 
Ricardo  differs  from  Adam  Smith  in  his  theory  of  rent  and 
in  his  doctrine  of  the  relation  of  profits  to  wages.  Ricardo's 
theory  of  economic  rent  leads  him  to  controvert  Adam  Smith's 
doctrine  of  the  ultimate  incidence  of  land  taxes  on  the  land- 
owner. A  tax  on  rent,  it  is  true,  says  Ricardo,  will  fall 
wholly  on  the  landlord ;  for  since  rent  is  the  surplus  above 
the  cost  of  production,  the  value  of  the  product  cannot  pos- 
sibly be  affected  by  the  tax.1  But  it  is  different  with  taxes 
on  produce,  tithes  or  land  taxes :  these  will  be  shifted  by  the 
landowners  to  the  consumers.  Since  price  is  fixed  by  the 

1  "A  tax  on  rent  would  affect  rent  only;  it  would  fall  wholly  on  landlords,  and 
could  not  be  shifted  to  any  class  of  consumers." —  On  the  Principles  of  Political 
Economy  and  Taxation.  By  David  Ricardo,  Esq.  London,  1817,  chap,  viii*, 
p.  221,  In  McCulloch's  edition,  1876,  this  is  found  in  chap,  x,  p.  102. 


n8          Shifting  and  Incidence  of  Taxation 

cost  of  production  on  land  of  the  poorest  quality,  runs  his 
argument,  whatever  increases  cost  raises  price.  But  a  tax 
which  is  imposed  on  all  cultivators  necessarily  increases  the 
cost  of  production.  Hence,  a  tax  on  produce  raises  price  and  is 
shifted  to  the  consumers.  A  rise  in  price  is  the  only  means 
by  which  the  cultivator  can  pay  the  tax  and  continue  to 
derive  "the  usual  and  general  profits  "  from  the  employment 
of  his  capital.  He  cannot  deduct  the  tax  from  his  rent,  for 
there  is  no  rent  on  the  land  which  fixes  price.  He  will  not 
deduct  it  from  his  profits,  because  there  is  no  reason  why  he 
should  stay  in  an  employment  with  smaller  profits.  He  can, 
therefore,  pay  the  tax  only  by  increasing  the  price.1 

All  land  taxes,  accordingly,  except  the  tax  on  pure  rent,  will, 
according  to  Ricardo,  fall  on  the  consumers.  But  although 
every  one  is  a  consumer,  not  all  consumers  will  pay  the  tax. 
One  large  class,  in  particular,  will  remain  exempt  —  the 
laborers;  for  a  tax  on  raw  produce,  like  any  tax  which  in- 
creases the  price  of  necessaries  of  life,  will  inevitably  raise 
wages.  "  Wages  never  continue  much  above  that  rate  which 
nature  and  habit  demand  for  the  support  of  the  labourer." 
But  as  wages  rise,  profits  must  fall.  A  land  tax  will  there- 
fore fall  not  on  the  landlord  or  the  stockholders,  but  on  the 
capitalist  employer  of  labor.2 

The  question  still  remains  whether  the  employer  can  shift 
the  tax.  In  other  words  :  What  is  the  incidence  of  a  tax  on 
profits  ?  Ricardo  agrees  with  Adam  Smith  in  holding  that  a 
tax  on  the  profits  of  a  particular  class  will  be  shifted  to  the 
consumers  through  a  rise  in  price.  But  in  the  case  of  a  tax 
on  all  profits,  the  problem  is  less  simple.  If  no  attention  be 
paid  to  foreign  trade,  a  rise  of  prices  will  ensue.  But  since 
money  is  a  commodity  imported  from  abroad,  a  rise  in 

1  On  the  Principles  of  Political  Economy  and  Taxation,  chap,  viii,  pp.  194, 
195,  and  chap,  ix,  p.  225.     In  McCulloch's  ed.  these  are  chap,  ix,  p.  91;  and 
chap,  xi,  p.  104. 

2  Ibid.,  p.  199  (McCulloch's  ed.,  p.  93).     Ricardo  seeks  to  prove  that  there 
will  not  be  any  considerable  interval  between  the  rise  in  the  price  of  corn  and 
the  rise  of  wages,  during  which  the  laborer  would  suffer.    Here,  as  elsewhere, 
however,  his  conclusions  are  too  rigid. 


The  Absolute  Theory  119 

prices,  if  it  occurred,  could  not  be  permanent.  In  return  for 
commodities  imported,  the  dear  goods  could  not  be  exported. 
On  the  contrary,  money  would  be  exported  until  prices  had 
fallen  to  their  former  level.  The  inference  is  that  a  tax 
on  profits  will  be  borne,  not  by  the  consumer,  but  by  the 
producer.1 

Finally,  a  tax  on  wages,  he  contends,  will  raise  wages. 
Ricardo  here  discusses  the  objections  raised  by  Buchanan  to 
the  doctrine  of  Adam  Smith.  He  does  indeed  make  the  two 
important  concessions  that  every  rise  in  the  price  of  necessa- 
ries does  not  necessarily  raise  wages,  and  that  wages  are  not 
generally  increased  by  the  amount  of  the  tax.2  But  with  his 
characteristic  fondness  for  the  larger  aspects  of  a  problem,  he 
goes  on  to  argue  as  if  these  concessions  did  not  invalidate  his 
general  doctrine.  On  the  assumption,  then,  that  taxes  do  raise 
wages,  Ricardo  concludes  that  they  inevitably  decrease  prof- 
its.3 He  objects,  however,  to  Adam  Smith's  contention  that 
the  tax  will  be  shifted  to  the  consumers.  For,  says  he,  since 
all  producers  are  consumers  of  each  other's  goods,  every 
dealer  would  raise  his  prices  by  the  increase  which  he  is 
compelled  to  pay ;  and  this  process  would  go  on  indefinitely, 

1  "  It  appears  to  me  absolutely  certain  that  a  well-regulated  tax  on  profits 
would  ultimately  restore  commodities,  both  of  home  and  foreign  manufacture,  to 
the  same  money  price  which  they  bore  before  the  tax  was  imposed."  —  Ibid.t 
chap,  xiii,  p.  283.     (McCulloch's  ed.,  chap,  xv,  p.  127.)     Cf.  chap,  xvi,  pp.  354, 
355.     (McCulloch's  ed.,  chap,  xviii,  p.  155.) 

2  "  It  must  therefore  be  conceded  to  Mr.  Buchanan  that  any  rise  in  the  price 
of  provisions  occasioned  by  a  deficient  supply  will  not  necessarily  raise  the  money 
wages  of  labor.    Taxes  so  far  as  they  impair  the  net  capital  of  the  country  dimin- 
ish the  demand  for  labor,  and  therefore  it  is  a  probable,  but  not  a  necessary,  nor  a 
peculiar  consequence  of  a  tax  on  wages,  that  though  wages  would  rise,  they  would 
not  rise  by  a  sum  precisely  equal  to  the  tax."  —  Ibid.,  chap,  xiv,  pp.  288,  289,  297. 
(McCulloch's  ed.,  chap,  xvi,  pp.  130,  133.)     Yet  in  the  very  next  paragraph  he 
says  that  he  agrees  with  Adam  Smith. 

3  "  Taxes  on  wages  will  raise  wages,  and  therefore  will  diminish  the  rate  of  the 
profits  of  stock  .  .  .    The  only  difference  between  a  tax  on  necessaries  and  a  tax 
on  wages  is  that  the  former  will  necessarily  be  accompanied  by  a  rise  in  the  price 
of  necessaries  but  the  latter  will  not  ...     A  tax  on  wages  is  wholly  a  tax  on 
profits,  a  tax  on  necessaries  is  partly  a  tax  on  profits  and  partly  a  tax  on  rich  con- 
sumers."—  Ibid.,  p.  285.     (McCulloch's  ed.,  p.  129.) 


I2O          Shifting  and  Incidence  of  Taxation 

which  is  absurd.1  Since  the  tax  would,  therefore,  rest  on 
profits,  it  is  immaterial  whether  the  taxes  be  levied  on  profits 
or  on  wages.  It  is  always  the  profits  of  stock  on  which  these 
taxes  ultimately  fall. 

It  will  be  readily  seen  that  these  teachings  of  Ricardo 
depend  on  the  wage-fund  theory,  on  his  doctrine  of  profits, 
and  on  the  law  of  economic  rent.  They  stand  or  fall  with 
the  acceptance  or  rejection  of  his  general  theory  of  dis- 
tribution. Two  points,  however,  must  be  brought  promi- 
nently forward  —  on  the  one  hand,  the  difference  between 
Adam  Smith  and  Ricardo  in  results ;  on  the  other,  the  sim- 
ilarity in  their  methods. 

Adam  Smith,  as  we  saw,  holds  that  the  landowners  ulti- 
mately pay  most  of  the  taxes,  bearing  as  they  do  all  the  taxes 
on  land,  and  a  great  part  of  the  taxes  on  wages  and  profits. 
The/'rich  consumers"  pay  a  smaller  part,  and  the  lenders 
of  capital  still  less.  On  the  other  hand,  Ricardo  maintains 
that  the  landowner  pays  only  the  taxes  on  rent  proper,  but 
shifts  all  the  other  taxes  on  land.  Both  Ricardo  and  Adam 
Smith  agree  that  wages  can  never  be  reached  by  a  tax ;  but 
Adam  Smith  regards  the  landowners,  while  Ricardo  looks 
upon  the  recipients  of  profits  of  stock,  as  the  real  taxpayers 
of  the  country.  The  one  may  be  called  the  unconscious 
advocate  of  the  landed  interest,  the  other  of  the  moneyed 
interest. 

But  while  they  differ  in  result,  they  largely  agree  in 
method.  What  Roscher  calls  the  "  magnificent  abstractions  " 
of  Ricardo  are  perhaps  the  more  impressive.  In  his  reason- 
ing, no  allowance  is  made  for  conditions  or  qualifications. 
The  law  of  competition  is  assumed  as  perfect  in  its  opera- 
tions. The  absolute  transferability  of  capital  and  labor  is 
presupposed.  The  most  far-reaching  hypotheses  are  posited, 

1  "  If  they  could  all  raise  the  price  of  their  goods  so  as  to  remunerate  them- 
selves with  a  profit  for  the  tax :  as  they  are  all  consumers  of  each  other's  com- 
modities, it  is  obvious  that  the  tax  could  never  be  paid;  for  who  would  be  the 
contributors  if  all  were  compensated  ?  "  —  On  the  Principles  of  Political  Economy 
and  Taxation,  p.  303.  (McCulloch's  ed.,  p.  135.) 


The  Absolute  Theory  121 

in  the  belief  —  or,  at  all  events,  with  the  resulting  belief  on 
the  part  of  the  unwary  reader  —  that  they  are  exemplifica- 
tions of  actual  facts.  Everything  is  reduced  to  its  simplest 
form.  The  complicated  questions  of  industrial  society  are 
treated  as  more  or  less  plain  arithmetical  problems.  Even 
though  Ricardo's  fundamental  theory  of  distribution  were 
correct,  his  doctrine  of  incidence  would  thus  be  incomplete. 
It  might,  perhaps,  be  true  so  far  as  it  went,  but  it  would  even 
then  not  go  far  enough  to  explain  actual  phenomena.  It 
fails  to  notice  the  practical  effects  of  economic  friction. 
However  much  we  may  marvel  at  his  power  of  analysis,  we 
instinctively  regard  his  conclusions  with  some  suspicion. 
Ricardo's  doctrine  of  incidence  is  in  some  respects  prema- 
ture and  inadequate.  Because  of  its  rigidity  and  unyielding 
abstraction,  it  may  be  called  far  excellence  the  absolute 
theory. 


CHAPTER   III 

THE  EQUAL-DIFFUSION  THEORY 

THE  germ  of  this  doctrine  can  be  found  in  the  work  of  a 
renowned  Italian  economist  of  the  eighteenth  century,  Verri. 
He  lays  down  the  general  principle  that  every  tax  naturally 
tends  to  bring  about  an  equilibrium  because  it  strikes  every 
one  according  to  his  consumption.1  If  the  tax  is  levied  on 
land,  the  prices  of  agricultural  products  will  rise ;  if  on  wares 
and  manufactured  commodities,  the  merchants  and  artisans 
will  demand  more ;  if  on  the  working  classes,  they  will 
necessarily  exact  higher  wages.  Thus  taxes  always  have  an 
expansive  force;  they  tend  to  seek  a  level  in  a  continually 
larger  sphere.  From  this  point  of  view  it  would  appear  to 
make  no  difference  whether  taxes  were  imposed  on  one  class 
or  on  another.2 

But,  after  proving  to  his  satisfaction,  in  detail,  that  taxes 
tend  "  to  diffuse  and  to  equalize  themselves  on  consumption  "  3 
Verri  maintains  that  this  ostensible  law  of  indifference  is  not 
really  defensible.  For  this  equalization  of  the  burden  of  taxa- 
tion always  involves  a  continual  struggle  —  a  state  of  war  — 
or,  as  he  puts  it  in  another  place,  a  condition  of  revolu- 

1  "  Ogni  tribute  naturalmente  tende  a  livellarsi  uniformemente  su  tutti  gl'  indi- 
vidui  di  uno  stato  a  proporzione  delle  consumazioni  di  ciascuno."  —  Meditazione 
sulla  Economia  Politico,.     Di  Pietro  Verri  Milanese.     1771,  p.  xxx.     Cf.  Custodi's 
Collection  of  Scrittori  Classici^Italiani  di  Economia  Politico,,  Parte  Moderna, 
tomo  xv,  p.  244.     Milan,  1804. 

2  "  Cosi  il  tribute  ha  sempre  una  forza  espansiva  per  cui  tende  a  livellarsi  sulla 
sfera  piu  vasta  che  si  puo.     Riguardato  da  questo  canto  solo,  parebbe  indifferente 
che  ei  cadesse  piu  su  di  una  classe  d'  uomini  che  su  di  un'  altra."  —  Ibid.,  p.  247. 

8  "Chi  piu  consuma  piu  contribuisce  al  tributo;  e  il  tribute,  siccome  dissi,  si 
diffonde  e  conguaglia  sulle  consumazioni."  —  Ibid.,  p.  253. 

122 


The  Equal-diffusion  Theory  123 

tion,  between  individuals  and  classes.1  When  the  tax  is 
imposed  in  first  instance  on  the  rich  and  powerful,  they  can 
easily  shift  it  to  the  poor  and  weak;  but  when  the  tax  is 
assessed  directly  on  the  weak,  the  shifting  and  equalization 
will  take  place  slowly  and  with  all  those  delays  and  obstacles 
which  occur  when  the  poor  try  to  get  justice  from  the  rich. 
These  intervals,  Verri  concludes,  between  the  impulse  and 
the  final  repose  form  the  most  important  crisis  in  national 
life,  and  are  especially  to  be  borne  in  mind  in  considering 
each  transfer  of  taxation.2  Verri  accordingly  is  a  strong 
advocate  of  the  exemption  of  the  poorer  classes  from  taxation. 
A  few  years  even  before  Verri,  the  idea  was  advanced  by 
an  Englishman,  Lord  Mansfield.  "I  hold  it  to  be  true," 
said  Mansfield,  "  that  a  tax  laid  in  any  place  is  like  a  pebble 
falling  into  and  making  a  circle  in  a  lake,  till  one  circle 
produces  and  gives  motion  to  another,  and  the  whole  circum- 
ference is  agitated  from  the  centre."  3  Mansfield,  however, 
made  no  further  application  of  the  doctrine.  Several  years 
later,  Dickson  4  described  the  process  of  the  shifting  of  taxes, 
which  he  thought  would  result  in  a  situation  where  all  per- 
sons concerned  would  finally  bear  a  just  proportion  of  the 
increase  of  price  due  to  the  tax.5 

1  "  Questo  conguaglio  e  questa  suddivisione  del  tribute  e  sempre  uno  stato  di 
guerra  fra  ceto  e  ceto  d'  uomini."     "  II  tempo  che  trascorre  fra  la  imposizione  del 
tribute  e  il  conguaglio,  e  un  tempo  di  guerra  e  di  rivoluzione."  —  Ibid.,  pp. 

253.  254. 

2  "  Quando  il  possessore  e  il  cittadino  che  ha  fondi  debbono  anticipare  il  tribute, 
la  suddivisione  nel  minuto  popolo  si  fa  sollecitamente  e  con  poco  ostacolo,  perche 
egli  e  il  potente  che  richiede  ragione  dal  debole;  ma  quando  il  tributo  imme- 
diatement  cada  di  primo  slancio  sulla  classe  del  debole,  la  suddivisione  si  fara,  ma 
con  quella  lentezza  o  con  quegli  ostacoli  che  debbon  nascere  quando  il  debole  e 
povero  cerca  ragione  dal  ricco  e  potente.     Questi  intervalli  fra  1'  impulso  e  la 
quiete  sono  le  crisi  piu  important!  negli  stati,  e  sono  ben  da  osservarsi  in  ogni 
cambiamento  di  tributo."  —  Ibid.,  p.  254. 

3  "Speech   on  Taxing  the  Colonies,"   1766.-    In   Lord  Mansfield's  Collected 
Speeches.     Quoted  by  F.  A.  Walker,  The  Wages  Question,  p.  316. 

4  An  Essay  on  the  Causes  of  the  Present  High  Price  of  Provisions  as  connected 
with  Luxury,  Currency,  Taxes,  and  National  Debt.    [By  Adam  Dickson.]    Lon- 
don, 1773. 

5  "In  the  payment  of  taxes,  no  man  is  a  patriot;  every  person  endeavors  to 


124          Shifting  and  Incidence  of  Taxation 

Another  English  writer  of  about  the  same  date  thought 
that  a  tax  inevitably  tends  to  raise  the  prices  of  all  commodi- 
ties, including  those  not  taxed ; l  "  for  taxes,  like  the  various 
streams  which  form  a  general  inundation,  by  whatever  chan- 
nels they  separately  find  admission,  unite  at  last  and  over- 
whelm the  whole."  2  Every  one,  therefore,  really  bears  a 
part  of  the  burden,  even  if  the  tax  is  not  imposed  upon  him. 
In  still  another  work,  written  toward  the  end  of  the  eigh- 
teenth century  by  John  Young,  the  same  idea  is  expressed 
somewhat  more  fully.3  Young  maintains  that  taxes  not  only 

evade  them,  or  to  oblige  others  to  reimburse  him  for  what  he  pays.  The  first  can 
only  be  done  in  a  small  degree,  the  last  is  the  method  commonly  taken.  When  a 
tax  is  laid  upon  any  manufacture,  the  manufacturer,  in  order  to  carry  on  trade  to 
the  same  extent  as  formerly,  must  either  borrow  money  for  which  he  must  pay 
interest,  or  he  must  purchase  at  a  longer  credit,  which,  with  respect  to  his  sell- 
ing, is  the  same  thing  with  purchasing  at  a  higher  price.  He  must,  therefore,  lay 
upon  the  commodities  which  he  sells  the  interest  of  the  money  which  he  borrows, 
or  the  additional  price  which  he  pays  for  the  materials  which  he  manufactures. 
Besides  this,  he  lays  upon  the  price  of  these  commodities  the  whole  tax  which  he 
pays.  This  at  least  with  all  his  address  he  endeavors  to  do.  The  persons  that 
consume  the  commodities  which  he  manufactures,  finding  the  prices  of  these 
raised,  instead  of  retrenching,  which  is  commonly  a  disagreeable  thing,  endeavor 
in  their  turn  to  raise  the  prices  of  the  commodities  in  which  they  deal.  Thus,  if 
the  tax  makes  a  very  considerable  difference,  the  prices  are  raised  in  a  rotation, 
and  at  last  come  to  the  manufacturer  where  the  rise  began,  who,  in  consequence 
of  this,  if  in  his  power,  begins  another  rise,  which  every  person  will  endeavor  to 
push  around  in  the  same  manner,  so  that  a  heavy  tax  naturally  raises  the  prices  of 
commodities  gradually,  till  such  time  as  they  are  fixed  in  such  a  state  as  to  make 
all  persons  concerned  bear  a  just  proportion  of  it."  —  An  Essay,  pp.  66-67.  [By 
Adam  Dickson.]  London,  1773. 

1  "  Besides  this,  every  new  tax  does  not  only  affect  the  price  of  the  commodity 
on  which  it  is  laid,  but  that  of  all  others,  whether  taxed  or  not,  and  with  which, 
at  first  sight,  it  seems  to  have  no  manner  of  connection.    Thus,  for  instance,  a  tax 
on  candles  must  raise  the  price  of  a  coat,  or  a  pair  of  breeches;   because,  out  of 
these,  all  the  taxes  on  the  candles  of  the  wool-comber,  weaver,  and  the  tailor, 
must  be  paid:   A  duty  upon  ale  must  raise  the  price  of  shoes;  because  from  them 
all  the  taxes  upon  ale  drank  by  the  tanner,  leather-dresser,  and  shoe-maker, 
which  is  not  a  little,  must  be  refunded." —  Thoughts  on  the  Causes  and  Conse- 
quences of  the  Present  High  Price  of  Provisions.     London,  1767,  pp.  4,  5. 

2  Ibid.,  p.  5. 

3  Essays  on  the  following  Interesting  Subjects  :  viz.,  I  Government,  II  Revo- 
lution, etc.,  etc.,  VII  Taxation,  and  VIII  The  Present   War.     By  John  Young, 
D.D.     Glasgow,  4th  ed.,  1794. 


The  Equal-diffusion  Theory  125 

raise  the  price  of  the  commodities  taxed,  but  tend  to  lower 
the  value  of  money,  and  thus  to  raise  the  prices  of  all  other 
commodities.  Ultimately,  says  he,  they  also  increase  wages. 
But  laborers,  providing  they  are  willing  to  live  on  the  prod- 
uce of  the  country  and  be  clad  as  their  fathers  were,  in  their 
own  manufacture,  "pay  practically  nothing  to  government 
and  yet  get  higher  wages."  "Thus  it  appears,"  observes 
Young,  "  that  though  taxes  newly  imposed  must  be  burden- 
some ;  because  they  take  from  the  people  so  much  of  what 
was  formerly  their  own ;  yet  the  longer  they  continue,  they 
become  the  lighter :  and,  in  process  of  time,  they  cease  to  be 
a  burden  at  all."  1  "  This  may  be  thought  a  bold  assertion," 
adds  Young,  "but  it  is  capable  of  demonstration."  2 

Verri,  as  well  as  the  English  writers,  however,  seem  to 
have  passed  unnoticed.  The  theory  in  its  modern  form  really 
dates  back  to  the  celebrated  book  of  Canard,3  which  has  now 
become  so  rare  as  to  justify  a  somewhat  fuller  treatment. 

Canard  expounds  his  views  in  a  work  avowedly  written  to 
disprove  the  Physiocratic  theory  of  incidence.  According  to 
him,  there  is  not  only  a  natural  labor,  —  that  is,  labor  neces- 
sary to  sustain  existence,  —  but  also  what  he  calls  acquired 
labor,  as  well  as  superfluous  labor.  These  three  kinds  of 
labor  lay  the  foundation  of  all  surpluses  or  rents.  There  are, 
therefore,  three  rents :  rente  fonciere,  the  result  of  the  fixed 
labor  applied  to  land  or  industry ;  rente  industrielle,  the  re- 
sult of  the  travail  appris  in  industry ;  and  rente  mobiliere,  the 
result  of  the  travail  superflu  in  commerce.  The  aim  of  every 
man  is  to  turn  his  labor  into  that  particular  kind  of  occupa- 
tion which  will  give  him  the  greatest  rent  or  surplus.  From 
this  mutual  struggle  results  the  system  of  "equilibrium  of 
advantages,"  the  laws  of  which  are  the  explanation  of  all 
economic  phenomena.4  The  balance  or  equilibrium  of  these 
three  rents  is  the  foundation  of  the  law  of  incidence. 

1  Ibid.,  p.  128.  2  ffid.,  p.  125. 

3  Principes  d"1  Economic  Politique.     Ouvrage  couronne  par  I'Institut  National. 
Par  N.  F.  Canard.     Paris,  an  X  (1801). 

4  "L'equilibre  des  rentes."  —  Ibid.,  pp.  10-12. 


126          Shifting  and  Incidence  of  Taxation 

All  taxes,  he  continues,  must  be  paid  from  one  of  these 
three  rents,  since  a  tax  can  never  remain  on  the  travail  natu- 
rel  which  is  necessary  to  existence.  All  taxes,  again,  are 
shifted  because  they  disturb  the  equilibrium  between  the 
rents.  Hence  it  makes  no  difference  how  a  tax  is  imposed, 
whether  on  rent  or  on  consumption.  The  incidence  will  al- 
ways be  the  same ;  for  a  tax  always  diminishes  the  desire  or 
|  "  determination  "  of  the  buyer  and  seller,  and  no  sale  will  take 
1  place  until  these  desires  are  equalized  by  each  party  assum- 
ing one-half  of  the  tax.  This  is  the  "equilibrium  of  the 
determination  "  to  exchange.  The  first  step  in  the  shifting 
of  taxes  is  then  like  this : *  — 

i\  T  is  share  of  first  seller. 
(  \  T  is  share  of  second  seller. 

— -  -/-  «   *  T  i  T  is  share  of  third  seller. 

Share  of  second  buyer  is  .    4  T  ,  T  is  share  of  fourth  seller. 

Share  of  third  buyer  is      .     .     .    ^  \  T  j 

Share  of  fourth  buyer  is    ....        *•  ^  T,  etc. 

But  this  is,  of  course,  only  the  first  step.  The  first  seller 
will  immediately  see  that  he  is  bearing  one-half  of  the  tax, 
while  only  one-quarter  rests  on  the  buyer.  He  will  perceive 
that  the  buyer's  "determination"  to  exchange  is  stronger 
than  his,  and  will,  therefore,  refuse  to  sell.  But  if  the  buyer 
assumes  an  additional  share  of  the  tax,  as  he  well  can,  he 
will  for  the  same  reasons  shift  a  part  of  the  tax  to  the  next 
seller,  and  so  on.  There  will  be  no  equilibrium  until  each 
bears  an  equal  share. 

To  understand  how  the  burden  of  the  tax  is  distributed  be- 
tween buyer  and  seller,  Canard  likens  the  system  of  circula- 
tion of  goods  to  a  series  of  communicating  tubes.  No  matter 
how  much  water  we  pour  in  or  out  of  any  one  tube,  every 
one  of  the  other  tubes  will  gain  or  lose  until  the  level  is 
again  reached  in  all.  Just  as  the  water  will  seek  its  level 
by  distributing  itself  proportionally  to  the  diameter  of  each 
tube,  so  every  tax  will  be  distributed  equally  between  buyers 

1  Principes  dj  Economic  Politique,  p.  158. 


The  Equal-diffusion  Theory  127 

and  sellers  according  to  their  capacity  to  labor.1  Hence  it  is 
useless  for  economists  to  devise  schemes  for  taxing  forms  of 
business  which  seem  not  to  be  hit  by  any  existing  tax.  It  is, 
moreover,  utterly  futile  for  the  banker  or  merchant  to  hide 
his  books ;  for  the  taxation  of  any  one  branch  of  industry  is 
like  the  operation  of  cupping.  The  vein  from  which  the 
surgeon  has  taken  the  blood  is  not  more  bloodless  after  the 
operation  than  any  of  the  other  veins  of  the  body.  So  it  is 
with  the  profits  of  any  branch  of  industry  which  are  dimin- 
ished by  a  tax ;  the  profits  of  all  other  branches  flow  in  at 
once,  until  the  equilibrium  is  restored.2  It  may  be  said,  in 
fact,  that  the  burden  of  the  tax  finally  disappears,  and  that 
the  tax  is  ultimately  borne  by  no  one  at  all.3 

Canard,  however,  confesses  that  it  takes  some  time  for  this 
equilibrium  to  be  realized.     There  will,  he  admits,  be  many 

1  "  Pour  concevoir  comment  1'impot  se  repartit  sur  tous  les  acheteurs-vendeurs, 
imaginons  une  suite  de  tubes  se  communiquant  entr'eux;  si  dans  1'un  d'eux  on 
verse  un  liquide  quelconque,  il  s'ecoulera  successivement  dans  tous  les  tubes,  et 
1'ecoulement  cessera  lorsqu'il  y  sera  de  niveau.     Alors  le  liquide  sera  reparti  dans 
tous  les  tubes  proportionellement  a  leur  diametre,  de  m8me  que  1'impot  est  reparti 
sur  tous  les  acheteurs-vendeurs,  proportionellement  a  la  capacite  de  leur  travail." — 
Ibid.,  p.  161.     "Les  lois  d'equilibre,  dans  le  systeme  general  de  la  circulation, 
sont  les  mSmes  que  les  lois  de  1'equilibre  des  fluides."  — Ibid.,  p.  233. 

2  "  C'est  done  bien  vainement  que  les  economistes  s'epuisent  en  moyens  pour 
chercher  a  atteindre  par  1'impot  les  branches  qui  lui  paraissent  inaccessibles : 
1'impot  que  1'on  percoit  sur  une  branche  d'industrie  ressemble  a  la  saignee  que 
le  chirurgien  fait  au  bras;  la  veine  qu'il  a  piquee  n'est  pas  plus  appauvrie  du  sang 
apres  1'operation,  que  toutes  les  autres  parties  du  corps.     II  en  est  de  meTne  du 
gain  que  1'impot  soutire  d'une  branche;  le  gain  des  autres  branches  vient  tout-a- 
coup  y  affluer  pour  retablier  1'equilibre."  —  Ibid.,  pp.  168,  169. 

3  "  On  peut  dire,  a  la  rigueur,  que  la  charge  de  I'impdt  finit  par  Stre  tout-a-fait 
nulle,  et  n'est  supportee  par  aucun  individu."  —  Ibid.,  p.  178.     In  another  pas- 
sage Canard  pictures  the  process  as  follows :  "  Ainsi,  voici  la  marche  que  suit  la 
charge  de  1'impot :    i°  elle  s'ecoule  d'abord  de  celui  qui  le  paie  le  premier  sur 
tous  les  autres  acheteurs-vendeurs  et  consommateurs  de  la  meme  branche;    2°  de- 
la  elle  se  repand  de  proche  en  proche  sur  toutes  les  autres  branches,  par  la  nou- 
velle   concurrence   qu'apportent  ceux  qui  quittent  les  branches  imposees,  pour 
s'attacher  a  celles  qui  ne  le  sont  pas;   3°  enfin,  cet  exces  de  concurrence  va  se 
perdre  dans  la  branche  immense  de  Peffort  politique  alimentee  par  1'impot,  et 
dont  la  consommation  dedommage  les  autres  branches  de  la  diminution  de  la 
consommation  superflue  qui  en  resulte.     Alors  la  charge  de  I'imp8t  est  entiere- 
ment  de  niveau,  alors  elle  n'est  plus  sentie."  — Ibid.,  p.  180. 


128          Shifting  and  Incidence  of  Taxation 

contests  between  buyers  and  sellers  and  many  difficulties  in 
the  way.  These  difficulties  he  calls  the  "friction  of  taxa- 
tion." 1  During  this  period  of  returning  equilibrium,  even  the 
"natural  labor,"  or  the  wages  of  the  ordinary  laborer,  may  be 
affected  by  the  tax.  Moreover,  this  period  of  friction  pro- 
duces serious  fluctuations,  which  throw  all  business  into 
confusion  until  the  equilibrium  is  again  reached.  It  is  not 
so  much  the  tax  which  causes  the  trouble,  as  the  derange- 
ment of  the  equilibrium.  Hence,  concludes  Canard,  we  may 
advance  this  great  truth :  "  Every  old  tax  is  good,  every  new 
tax  is  bad."2  A  government  which  does  not  possess  a  fixed, 
invariable  system  of  taxation  is  like  the  planter  who  is  con- 
tinually changing  his  methods,  but  whose  land,  in  the  mean- 
time, produces  nothing,  until  the  owner  himself  is  ruined.3 
Every  tax  becomes  good,  provided  it  lasts  long  enough.4 
Curiously  enough,  Canard's  practical  solution  of  the  problem 
is  found  in  the  proposal  to  replace  all  existing  taxes  by  a  tax 
on  salt. 

The  theory  of  Canard  was  accepted  by  several  writers, 
notably  by  Courcelle-Seneuil  and  Cherbuliez  in  France,  and 
by  Prittwitz  in  Germany.  Courcelle-Seneuil  tells  us  that  old 
taxes  act  exactly  like  climatic  or  agricultural  disadvantages. 
Society  is  poorer,  says  he,  than  it  would  be  if  these  dis- 
advantages did  not  exist,  but  the  disadvantages  are  spread 
over  the  whole  community.5  Cherbuliez  expresses  the  same 

1  "  Cette  difficulte,  c'est  ce  que  j'appellerai  le  frottement  de  Pimpot."  —  Prin- 
cipes  d'£conomie  Politique,  p.  181. 

2  "  On  voit  done  que  ce  n'est  pas  1'impot  par  lui  me"me  qui  fait  le  mal,  mais 
seulement  le  derangement  de  1'equilibre  qu'il  cause.     Done  on  peut  avancer  cette 
grande  verite,  que  tout  vieil  impbt  est  bon,  et  tout  nouvel  impot  est  mauvais"  — — 
Ibid.,  p.  197- 

3  "  Un  gouvernement  qui  n'a  pas  une  maniere  fixe  et  invariable  d'impositions, 
ressemble  a  un  proprietaire  qui,  apres  avoir  fait  une  plantation,  s'en  degoute,  la 
change  pour  une  autre,  et  celle-ci  pour  une  autre  encore;    pendant  ce  temps 
la  terre  ne  produit  rien,  et  le  proprietaire  se  mine."  —  Ibid.,  p.  198. 

4  "  Tout  impot  ne  devient  bon  que  par  sa  vetuste."  —  Ibid.,  p.  233.    Cf.  p.  202. 

5  "  Lorsque  les  impots  ont  re^u  la  sanction  du  temps,  ils  ne  touchent  plus  a  la 
propriete  d'aucun  individu  en  particulier,  parceque  chacun  a  arrange  sa  vie  en 
vue  de  son  existence.     Ils  agissent  alors  exactement  comme  les  inconvenients  du 


The  Equal-diffusion  Theory  129 

idea,  but  in  somewhat  modified  form,  in  saying  that  stability 
is  the  best  quality  of  a  tax  system,  as  mobility  is  the  worst. 
All  taxes,  he  argues,  no  matter  how  bad  at  first,  gradually 
become  good.1 

The  theory  reached  its  final  stage  in  the  German  writer 
Prittwitz,  who  maintained  that  the  only  way  to  secure  a  just 
and  equitable  distribution  of  taxes  was  through  a  permanent, 
immutable  system,  and  that  this  would  be  equally  true,  even 
though  the  system  were  at  its  inception  the  most  absurd  and 
burdensome  one  imaginable.2  It  is  for  this  reason  that  the 
theory  may  be  called  the  "  optimistic  "  theory. 

The  writer  who  may  be  said  to  share  with  Canard  the 
doubtful  honor  of  founding  the  optimistic  theory  is  Thiers. 
He  wrote  quite  independently  of  Canard,  and  is  of  especial 
importance  as  being  the  inventor  of  the  term  "  diffusion  "  of 
taxes  —  a  term  which  he  borrows  from  the  science  of  optics. 
He  compares  the  shifting  of  taxes  to  the  diffusion  of  the  rays 
of  light,  and  lays  down  his  principle  in  the  following  words  : 
"  Taxes  are  shifted  indefinitely,  and  tend  to  become  a  part  of 
the  prices  of  commodities,  to  such  an  extent  that  every  one 
bears  his  share,  not  in  proportion  to  what  he  pays  to  the 
state,  but  in  proportion  to  what  he  consumes."  3  The  argu- 

climat  et  du  sol :  la  societe  en  general  est  moins  riche  que  si  ces  inconvenients 
n'existaient  pas;  mais  cette  diminution  de  richesse  se  trouve  repartie  de  telle 
facon  que  toutes  les  forces  mecaniques  sont  dans  leur  equilibre  naturel."  —  Traite 
th'eorique  et  pratique  d*  Economic  Politique.  Par  J.  C.  Courcelle-Seneuil.  Paris, 
1857.  2d  ed.,  1867,  i,  p.  462. 

1  "  La  stabilite  est  le  merite  le  plus  essentiel,  la  mobilite  le  plus  grave  defaut 
que  puisse  avoir  un  regime  pratique  de  fiscalite.     Tout  systeme  d'impots,  quelque 
vicieux  qu'il  puisse  Stre  en  theorie,  au  point  de  vue  de  la  repartition,  va  s'ameliorant 
en  pratique  avec  les  annees,  a  mesure  que  les  effets  immediats  du  prelevement 
sont  amortis  et  successivement  effaces  par  1' action  toujours  graduelle,  souvent  tres 
lente,  mais  invariable  et  certaine,  des  lois  qui  gouvernent  la  vie  economique  des 
societes." —  Precis  de  la  Science  Economique  et  de  ses  principales  Applications. 
Par  A.-E.  Cherbuliez.     Paris,  1862,  ii,  p.  457. 

2  "  Denkbar  abenteuerlichste  und  driickendste  "  are  the  words.      Cf.  Die  Kunst 
reich  zu  werden,  oder  gemeinfaszliche  Darstellung  der  Volkswirthschaft.     Von  M. 
v.  Prittwitz.     Mannheim,  1840,  pp.  515-522  ;   and  the  same  writer's  Theorie  der 
Steuern  und  Zolle,  Stuttgart,  1842,  pp.  107-116. 

3  "  L'impot  se  repartit  a  1'infini,  et  tend  a  se  confondre  avec  le  prix  des  choses, 

K 


130          Shifting  and  Incidence  of  Taxation 

ments  with  which  Thiers  supports  this  thesis  are  as  follows : 
The  manufacturer  who  pays  a  tax,  whether  direct  or  indirect, 
adds  the  tax  to  the  price  of  the  commodity ;  for,  consciously 
or  not,  he  necessarily  fixes  the  price  so  as  to  recompense  him 
for  all  his  outlays,  plus  a  certain  profit.  Otherwise  he  would 
quit  the  business.  The  tax,  then,  is  simply  a  part  of  the  cost 
of  production.  This  is  true  not  only  of  the  manufacturer, 
but  of  the  farmer.  If  he  is  to  remain  in  the  occupation  of 
agriculture,  all  his  outlays  must  be  made  good.  So,  again, 
the  laborer  is  in  precisely  the  same  situation ;  for  unless  his 
wages  increase  by  the  amount  of  the  tax,  he  must  change  his 
occupation  or  die  of  hunger.  Thus  all  taxes  are  indefinitely 
shifted. 

When  we  remember  that  Thiers'  whole  work  was  written 
to  prove  the  absolute  rights  of  private  property,  we  need  not 
feel  surprised  at  his  conclusions.  He  tells  us  that,  according 
to  this  most  wise  and  reassuring  law  of  providence,  no  mat- 
ter what  the  government  may  do,  it  is  always  the  rich  who 
pay  most  of  the  taxes,  because  they  consume  the  most.1  To 
the  socialists,  he  says :  Hands  off,  do  you  not  see  that  the 
rich  already  pay  most  of  the  taxes  ?  To  the  radicals,  who 
wish  to  restrict  the  province  of  indirect  taxes  because  they 
bear  heavily  on  the  poor,  he  says:  Stop,  that  is  not  true;  the 
rich  already  pay  more  than  their  share. 

The  logical  conclusion  of  what  Thiers  calls  this  "rigor- 
ously true  "  theory  of  incidence  would  undoubtedly  be  that 
it  makes  no  difference  what  system  of  taxation  is  adopted. 
But,  "God  forbid  that  I  should  maintain  such  a  heresy,"2 
cries  Thiers,  much  to  our  surprise.  He  demands,  in  the  first 

au  point  que  chacun  en  supporte  sa  part,  non  en  raison  de  ce  qu'il  paye  a  1'Etat, 
mais  en  raison  de  ce  qu'il  consomme."  —  De  la  Propriete.  Par  M.  A.  Thiers. 
Paris,  1848,  p.  381.  Cf.  "L'impot  se  repercute  a  1'infini,  et  de  repercussions  en 
repercussions  devient  en  definitive  partie  integrante  du  prix  des  choses.  C'est  ce 
qui  j'appelle  la  diffusion  de  I'impSt."  —  Ibid.,  p.  382. 

1  "  Par  une  loi  des  plus  sages,  des  plus  rassurantes   de  la   Providence,  de 
quelque  fagon  que  s'y  prennent  les  gouvernements,  le  riche  est  apres  tout  le  plus 
soumis  a  I>imp8t."  —  Ibid.,  p.  389. 

2  "Dieu  me  preserve  de  soutenir  une  pareille  heresie." 


The  Equal-diffusion   Theory  131 

place,  equality  of  taxation,  without  attempting,  however,  to 
show  in  what  this  equality  consists.  Secondly,  he  makes  the 
important  concession  that,  although  the  tax  is  ultimately 
shifted,  it  is,  for  the  time  being,  a  burden  on  the  first  payer. 
But  he  at  once  complacently  ignores  these  concessions  and 
maintains  that,  in  the  long  run,  regardless  of  any  act  of  the 
government,  it  is  always  the  rich  who  pay  the  taxes. 

It  is  to  be  noticed  that  this  rather  shallow  doctrine  of 
Thiers  met  with  almost  no  success  in  France,  where  de 
Broglie  is  almost  the  only  writer  who  has  adopted  it,  in 
speaking  of  the  "indefinite  repercussion"  of  taxes.1  It 
is  remarkable,  however,  that  it  should  have  found  adherents 
in  other  countries.  The  most  noteworthy  modern  follower 
of  Thiers  is  the  Austrian  professor,  Stein,  who  goes  so  far 
as  to  declare  the  whole  doctrine  of  shifting  to  be  the  result 
of  a  "  marvellous  confusion  of  thought."  According  to 
Stein,  every  tax  is  shifted  by  everybody  on  everybody, 
since  everybody  merely  advances  the  tax  for  somebody  else 
who  uses  his  productions.  From  this  theory  logically  fol- 
lows that  there  is  no  need  of  a  science  of  taxation.  In  place 
of  the  "confused  doctrine"  of  the  shifting  of  taxes,  Stein 
propounded  the  "simple  idea  of  the  production  of  taxes,"  the 
idea  that  "  the  total  amount  of  all  taxes  must  be  really  pro- 
duced every  year  as  the  surplus  of  production."2 

Although  this  conception  may  be  very  "  simple  "  to  Stein, 
it  must  be  confessed  that  even  all  subsequent  German  writers 

1  "Tout  impot  tombe,  en  derniere  analyse,  sur  le  consommateur;  tout  imp8t 
entre,  comme  element  integrant,  dans  le  prix  des  choses  consommables."  —  Le 
Libre  ^.change  et  V  Impot.    Etudes  &  Economic  Politique.    Par  le  Due  de  Broglie. 
New  ed.     Paris,  1885,  p.  48.     The  passage  originally  appeared  in  his  monograph, 
Les  Impbts  et  les  Emprunts,  published  in  1849. 

2  Lehrbuch  der  Finanzwissenschaft.     Von  Dr.  Lorenz  von  Stein.     4th  ed. 
Leipzig,  1878,  i,  pp.  493-497:   "Die  Lehre  von  der  Uberwalzung  der  Steuern 
ist  eine  der  wunderlichsten  Begriffsverwirrungen,  die  es  je  in  der  Wissenschaft 
gegeben  hat.  .  .   .    Das  grosse  Resultat  ist  das  jede  Steuer  von  jedem  auf  jeden 
Uberwalzt  wird.  .  .  .     An  die  Stelle  der  unklaren  Ueberwalzung  der  Steuern 
tritt  der  klare  Begriff  der  Production  derselben.  .  .  .     Die  Gesammtsumme  aller 
Steuern  muss  alljahrlich  als  Mehrwerth  der  Production  von  dem  Volke  wirklich 
producirt  werden.  .  .  .      Das  ist  der  einfache  Begriff  der  Steuerproduction." 


OF  THE 
TT-KTTXr-p.T?  QTTT 


132          Shifting  and  Incidence  of  Taxation 

have  declared  themselves  unable  to  understand  what  it  means. 
We  may,  therefore,  be  excused  from  attempting  to  unravel 
the  mystery. 

In  England,  we  find  during  the  nineteenth  century  com- 
paratively few  allusions  to  the  theory.  Martin  summed  up 
the  doctrine  in  the  following  words :  "  The  public  are  the 
persons  on  whom  the  taxes  fall,  no  matter  how  they  may  be 
artfully  diverged  in  their  course."1  A  few  years  later  an 
anonymous  writer  devoted  a  volume  to  an  attempt  to  prove 
that  all  taxes  whatsoever  finally  fall  upon  the  consumer.2 
This  writer  was  evidently  Gibbon,  for  in  a  subsequent  work 
he  treats  the  subject  in  much  the  same  way,  and  states  the 
equal-diffusion  theory  in  almost  the  same  words  by  saying 
that  "all  taxes,  direct  or  indirect,  paid  by  the  producers  or 
importers  of  commodities,  and  by  the  dealers  therein,  — 
ultimately  fall  upon,  and  are  paid  by,  the  consumers,  by 
whomsoever  such  taxes  may  have  been  paid  to  the  col- 
lectors thereof,  or  into  the  public  chest."3  Gibbon  applied 
this  rule  to  practically  all  taxes,  for,  according  to  him, 
taxes  on  land  are  taxes  on  the  produce  of  the  land,  and, 

The  most  recent  attempts  to  understand,  and  at  the  same  time  to  combat,  Stein 
are  found  in  the  two  Dutch  works :  Cort  van  der  Linden,  Leerboek  der  Financi'en, 
1887,  §  81,  pp.  156-162;  and  Pierson,  Leerboek  der  Staathuishoudkunde,  1890, 
ii,  pp.  448-455. 

1  Taxation  of  the  British  Empire.     By  R.  Montgomery  Martin.     London, 
1833,  p.  245. 

2  "All  taxes,  direct  and  indirect,  paid  by  owners  or  occupiers  of  land;  and  all 
taxes  paid  by  the  dealers  in  the  productions  of  land,  on  their  way  from  the 
producer  to  the  consumer  —  and  all  taxes  whatsoever,  paid  by  producers  within 
the  United  Kingdom,  and  by  importers  of  all  commodities  for  home  consumption, 
and  by  the  dealers  in  all  such  commodities,  on  their  way  from  such  producer  or 
importer  to  the  consumer — as  well  as  all  taxes  of  Customs  or  of  Excise  imposed 
on  such  productions  or  commodities,  by  their  measure  or  weight,  —  ultimately  fall 
upon  and  are  paid  by  the  consumers  of  those  productions  or  commodities,  —  by 
whomsoever  such  taxes  may  have  been  paid  to  the  collectors  thereof,  or  into  the 
public  chests."  —  A  Familiar  Treatise  on   Taxation,  Free  Trade,  etc.,  compris- 
ing Facts  usually  unnoticed  or  unconsidered  in  Theories  of  those  Subjects.  London, 
1846,  p.  21.      Cf.  p.  46. 

8  Taxation  :  its  Nature  and  Properties,  with  Remarks  on  the  Incidence  and 
the  Expediency  of  the  Repeal  of  the  Income  Tax.  By  Alexander  Gibbon,  Esq. 
London,  1851,  p.  18. 


The  Equal-diffusion  Theory  133 

like  taxes  on  profits  or  income  taxes,  fall  in  the  end  on  the 
consumers."  1 

In  America,  the  few  writers  of  prominence  on  the  sub- 
ject of  taxation  were,  until  recently,  almost  all  followers  of 
Thiers.  America  may,  in  fact,  claim  the  honor  of  being  the 
only  country  in  the  world  where  the  doctrine  is  still  upheld. 
The  chief  representative  of  this  easy-going,  complacent  doc- 
trine is  David  A.  Wells.  "Taxes  equate  and  diffuse  them- 
selves," says  he,  "and  if  levied  with  certainty  and  uniformity 
they  will,  by  a  diffusion  and  repercussion,  reach  and  burden 
all  property  with  unerring  certainty  and  equality.  All  taxa- 
tion ultimately  and  necessarily  falls  on  consumption.2  The 
same  opinion  has  been  advanced  by  Isaac  Sherman  in  the 
statement  that  "all  proportional  contributions  to  the  state 
from  direct  competitors  are  diffused  upon  things  and  persons 
by  a  uniformity  as  manifest  as  is  the  pressure  of  water  which 
is  known  to  be  uniform  in  all  directions."3  Even  Judge 
Cooley  is  not  entirely  free  from  a  share  in  this  opinion.4 

President  Walker  was  the  first  American  economist  to 
question  the  truth  of  the  optimistic  theory.5  He  seems,  how- 
ever, to  overlook  the  fact  that  this  is  only  one  among  many 
theories  of  incidence,  and  that  the  problem  of  shifting  cannot 
be  solved  simply  by  a  negation  of  the  equal-diffusion  doc- 
trine. It  may  also  be  mentioned  that  Alexander  Hamilton, 
at  the  end  of  the  eighteenth  century,  made  an  incidental 
allusion  to  the  equal-diffusion  theory,  although  the  term 

1  Ibid.,  pp.  19,  26,  33. 

2  Article  "  Taxation  "  in  Lalor's  Cyclopaedia  of  Political  Science,  iii,  p.  88.     The 
editor  of  this  cyclopaedia  makes  the  remarkable  statement :  "  Mr.  Wells'  views  are 
in  harmony  with  those  of  Adam  Smith,  Ricardo,  James  Mill,  Thiers,  McCulloch 
and  Say."     A  most  remarkable  jumble !  —  Cf.  another  statement  of  Mr.  Wells' 
theory  in  the  Second  Report  of  the  New   York   Tax  Commission,  1872,  p.  47, 
where  he  quotes  Thiers  approvingly. 

3  The  Exclusive  Taxation  of  Real  Estate  and  the  Franchises  of  a  Few  Speci- 
fied Moneyed  Corporations.     By  Isaac  Sherman.     New  York,  1874. 

4  A  Treatise  on  the  Law  of  Taxation.    By  Thomas  M.  Cooley.    Chicago,  1881, 
2d  ed.,  1886,  p.  38. 

5  Political  Economy.     By  Francis  A.  Walker.     3d  ed.     New  York,   1 888, 
§§  606-610. 


134          Shifting  and  Incidence  of  Taxation 

was,  of  course,  not  employed  by  him.  Hamilton,  however, 
was  too  great  a  statesman  to  be  deluded  by  the  specious  ad- 
vantages of  a  system  of  taxation  based  on  this  theory.  He 
was  careful  to  point  out  that  the  important  thing  is  to  dis- 
tribute the  burdens  equitably  at  first,  and  not  to  rely  upon  the 
supposed  automatic  working  of  any  such  general  principle.1 

The  optimistic  theory  is  so  superficial  that  it  scarcely 
deserves  a  refutation.  The  doctrine  has  never  been  accepted 
by  any  writers  of  importance,  except  the  few  already  men- 
tioned ;  and  the  weakness  in  the  arguments  advanced  to  sup- 
port it  has  been  shown  a  hundred  times.  It  is  needless  to 
repeat  these  arguments  here,  as  our  review  of  the  eclectic 
theories,  as  well  as  the  whole  positive  and  constructive  part 
of  the  present  monograph,  will  show  the  shallowness  of  the 
doctrine.  Were  the  theory  true,  there  would  be  no  need  for 
any  investigation  like  the  present. 

What  may  be  called  the  pessimistic  theory  is,  like  the 
optimistic  theory,  also  based  on  the  doctrine  of  diffusion ;  but 
it  draws  entirely  different  conclusions.  Its  chief  apostle  is 
the  great  anarchist,  Proudhon.  According  to  him,  all  taxes 
are,  in  last  resort,  taxes  on  the  consumer.  Try  as  the  legislator 
may,  he  cannot  prevent  this  shifting.  The  whole  distinction 
between  direct  and  indirect  taxes,  he  concludes,  is  useless; 
and  the  result  of  such  attempt  at  classification  must  always  be 
"fiscal  nonsense."2  Since  the  mass  of  the  consumers  are 
poor,  says  he,  all  taxes  are  unjust,  because  they  inevitably 

1  "  Though  it  may  be  said  that  on  the  principle  of  a  reciprocal  influence  of 
prices,  whereon  the  taxes  are  laid  in  first  instance,  they  will  in  the  end  be  borne 
by  all  classes,  yet  it  is  of  the  greatest  importance  that  no  one  should  sink  under 
the  immediate  pressure.     The  great  art  is  to  distribute  the  public  burthens  well, 
and  not  suffer  them,  either  first  or  last,  to  fall  too  heavily  on  parts  of  the  commu- 
nity, else  distress  and  disorder  must  ensue ;  a  shock  given  to  any  part  of  a  political 
machine  vibrates  through  the  whole." —  The  Continentalist,  No.  6, 1782.    (  Works 
of  Alexander  Hamilton,  edited  by  Henry  Cabot  Lodge,  i,  p.  265.) 

2  "  En  resume,  de  quelque  maniere  qu'on  s'y  prenne  avec  I'impot,  on  obtient 
zero  de  resultat.     Cest  toujours  la  consommation  qui  le  paye."  ...     "  Voici  qui 
met  le  comble  a  la  deraison  fiscale.    En  derniere  analyse,  I'impot  est  acquitte  par  la 
masse." — Th'eorie  de  CImp&t.     Par  P.  J.  Proudhon.     Paris,  1861.     In  new  edi- 
tion, (Euvres  Completes.     Paris,  1868,  vol.  xv,  pp.  206,  166. 


The  Equal-diffusion  Theory  135 

press  on  the  poor  more  than  on  the  rich.  This  fact  consti- 
tutes the  inevitable  iniquity  of  taxation : a  taxation  is  necessary, 
and  yet  it  is  necessarily  unjust.  This  is  one  of  Proudhon's 
famous  "contradictions  economiques."  "The  problem  of 
taxation  is  hence  insoluble.  The  fault  lies  neither  with  the 
principle  of  proportion,  nor  with  the  revolution,  nor  with  the 
government ;  neither  with  ideas  nor  with  men ;  the  fault  is  to 
be  found  in  the  institutions,  which  themselves  depend  on  the 
nature  of  things." 

Proudhon's  pessimism  is  as  superficial  as  Thiers'  optimism. 
Each  contents  itself  with  words  instead  of  arguments.  Yet, 
however  widely  they  diverge  in  practical  results,  the  theories 
virtually  agree  in  asserting  that  it  really  makes  no  difference 
what  sort  of  taxes  are  imposed.  In  the  light  of  such  theories 
as  these,  the  whole  science  of  finance  appears  to  be  a  need- 
less product  of  jugglery  and  mystification. 

A  recent  American  writer,  Albert  S.  Bolles,  may  also  be 
regarded  as  an  advocate  of  the  pessimistic  theory,  although 
he  would  probably  resent  any  statement  that  he  had  been 
influenced  by  Proudhon.  In  fact,  he  bases  his  pessimism  on 
the  uncertainty  of  the  process  of  shifting.  According  to 
Mr.  Bolles,  "no  uniform  law  or  rule  prevails  or  can  possibly 
be  established  with  respect  to  the  transfer  (of  taxes.)."  .  .  . 
"  A  tax  which  is  fairly  assessed  on  all  property  in  the  begin- 
ning proves  a  highly  unjust  tax  in  its  operation.  .  .  .  Some 
are  obliged  to  bear  the  whole  burden,  they  can  shift  no  part 
of  it;  others  are  more  fortunate  and  shift  a  portion ;  others 
are  engaged  in  such  a  business,  or  happily  are  owners  of 
such  property,  that  they  can  shift  the  whole,  or  nearly  the 
whole  burden."  The  whole  system  thus  results  in  the 
greatest  inequalities.2 

1  "  L'iniquite  de  1'impot  ne  vient  done  pas  de  lui,  elle  a  son  principe  dans  ces 
transformations  engrenees,  dans  cette  oscillation  universelle,  dans  ces  inegalites 
organiques,  qui  sans  cesse,  par  leur  agitation  incoercible,  rejettent  sur  le  produit, 
et  consequemment  sur  la  masse  des  consommations,  ce  que  1'impot  s'etait  efforce 
de  repartir  entre  les  proprietes,  les  maisons,  les  industries,  les  capitaux,  les  loyers, 
etc."  —  7&V.,p.  222. 

2  Report  of  A.  S.  Bolles  in  Report  of  the  Revenue  Commission  appointed  by 


136          Shifting  and  Incidence  of  Taxation 

It  is  true  that  Mr.  Bolles  applies  his  doctrine  only  to  the 
general  property  tax.  But  the  reasoning  is  equally  appli- 
cable to  other  taxes ;  for  in  the  matter  of  incidence  there  is 
very  little  difference,  as  we  shall  see,  between  a  tax  on 
property  and  one  on  profits.  Almost  all  taxes  may  be  con- 
sidered, in  one  sense,  taxes  on  profits.  If  it  were  true  that  a 
uniform  tax  always  results  in  gross  inequalities,  the  outlook 
for  just  taxation  would  indeed  be  poor.  But,  as  will  appear, 
it  is  an  exaggeration  to  say  that  "uniform  rules  cannot  be 
established."  Pessimism  we  shall  find  to  be  as  untenable  as 
optimism. 

the  Act  of  the  Legislature  of  Pennsylvania,  May  25,  1889.     Philadelphia,  1890, 
p.  142. 


CHAPTER   IV 
THE  CAPITALIZATION  OR  AMORTIZATION  THEORY 

THE  origin  of  this  theory  is  connected  with  the  discussion 
of  the  land  tax.  To  the  extent  that  a  land  tax  falls  exclu- 
sively on  the  landowner,  it  was  observed  that  the  effect  is  to 
lower  the  value  of  the  land  by  the  capitalized  value  of  the 
tax.  In  other  words,  since  the  value  of  land  is  fixed  by  its 
net  produce,  a  tax  which  operates  to  decrease  this  net  prod- 
uce diminishes  the  value  of  the  land  by  an  amount  equal  to 
the  capitalized  value  of  the  tax.  The  individual  who  pur- 
chases such  land  will  pay  for  it  only  this  diminished  value. 
He  will  therefore  be  free  of  taxes,  since  he  has  discounted 
the  tax  by  paying  a  smaller  price  for  the  land.  The  tax,  in 
short,  becomes  a  perpetual  rent  charge,  allowance  for  which 
is  made  in  any  transfer  of  the  property.  From  this  argument 
the  conclusion  is  drawn  that  a  tax  on  land,  after  its  first 
imposition,  is  borne  by  no  one,  since  it  is  paid  once  and  for 
all,  and  is  then  immediately  shifted  off  in  a  capitalization  of 
the  tax.  It  is  therefore  entirely  immaterial  how  low  or  how 
high  the  rate  is,  provided  it  be  constant.  This  is  known 
as  the  capitalization  or  amortization  theory,  according  as  we 
look  to  the  increase  or  the  diminution  of  the  capital  value. 
Applied  especially  to  land,  it  is  also  known  as  the  rent-charge 
theory,  because  the  taxes  are  assumed  to  cease  to  be  taxes  on 
the  owner,  and  to  become  rent  charges  in  favor  of  the  state. 

The  germ  of  this  doctrine  may  be  found  in  the  work  of 
some  of  the  English  writers  of  the  eighteenth  century.  As 
far  back  as  1733,  a  pamphleteer  of  the  excise  controversy 
made  an  incidental  allusion  to  the  point.  Speaking  of  the 
effect  of  a  land  tax,  he  says :  "  As  for  those  who  are  late 

'37 


138          Shifting  and  Incidence  of  Taxation 

Purchasers,  they  have  little  Reason  to  complain,  since  they 
came  in  upon  the  Foot  of  the  Tax,  and  have  often  had 
Allowance  made  them  for  it  in  the  Purchase."  1  The  author, 
however,  draws  no  conclusions  from  this  principle.  At  a 
considerably  later  period,  John  Young  developed  the  same 
point  independently  in  an  interesting  passage  intended  to 
reenf orce  his  general  argument 2  that  the  weight  of  taxes  is 
not  so  burdensome  as  is  generally  believed.  Young  main- 
tained that  when  a  man  bought  a  piece  of  land  subject  to  a 
land  tax,  what  he  really  purchased  was  the  value  of  the  land 
less  the  capitalized  value  of  the  tax,  which  belonged  not  to 
him,  but  to  the  government.3 

The  writers  of  the  Physiocratic  school  in  France,  espe- 
cially Turgot  and  Baudeau,  also  called  attention  to  this  phe- 
nomenon.4 But  the  theory  was  without  much  influence  until 
after  the  beginning  of  the  nineteenth  century. 

The  earliest  of  the  nineteenth  century  writers  to  discuss 
this  problem,  and  in  some  respects  the  most  interesting,  was 
John  Craig.  This  author,  who  has  hitherto  been  singularly 
neglected,  is  worthy  of  notice  as,  until  very  recently,  the  only 
English  writer  to  devote  a  separate  volume  to  questions  of 
public  finance.  He  makes  use  of  the  argument  advanced 

1  The  Nature  of  the  Present  Excise,  and  the  Consequences  of  its  Farther  Ex- 
tension examined.     In  a  Letter  to  a  Member  of  Parliament.    London,  1 733,  p.  38. 

2  See  above,  p.  125. 

3  "  Let  the  land  tax  be  an  instance.     Suppose  it  fixed  at  a  real  two  shillings  in 
the  pound,  and  rendered  permanent.     In  that  case,  when  a  man  buys  an  estate 
he  knows  what  it  must  pay  to  Government;  he  buys  it  with  that  burden  upon 
it,  and  the  price  is  diminished  accordingly.     It  is  plain  that  if  it  is  worth  twenty- 
seven  years'  purchase  with  that  burden,  it  would  be  worth  thirty  without  it.    One- 
tenth  of  every  estate  really  belongs  to  Government;  this  he  does  not  purchase, 
but  only  the  nine  parts  that  belonged  to  the  former  proprietor.     The  same  is  the 
case  with  him  that  succeeds  to  it  as  his  father's  heir.     He  is  heir  only  to  the  nine 
parts  that  were  his  father's;   Government  is  not  dead,  and  therefore  continues  to 
inherit  its  own  tenth  part.     The  only  burden,  therefore,  that  lies  upon  the  pro- 
prietor of  the  estate  is  that  of  gathering  in  the  two  shillings  of  yearly  rent  that 
belongs  to  Government,  along  with  his  own  eighteen,  and  paying  it  in  to  the 
collector  of  the  land  tax."  —  Essays  on  the  Following  Interesting  Subjects,  etc. 
By  John  Young,  D.D.     4th  ed.,  Glasgow,  1794,  p.  125.     See  above,  p.  124. 

4  See  above,  pp.  106,  107. 


The  Capitalization  '  l^ieory  1 39 

above,  and  tells  us  that  the  tax  is  "  altogether  paid  by  the 
present  proprietors  to  the  entire  exemption  of  future  pur- 
chasers."1 But  he  limits  the  statement  with  an  important 
condition,  to  be  discussed  in  a  moment,  inattention  to  which 
has  led  succeeding  authors  to  somewhat  absurd  results. 

Some  of  the  early  German  writers  on  public  finance,  such 
as  Sartorius,  Hoffmann  and  Murhard,  went  so  far  as  to  de- 
clare that,  because  of  this  capitalization,  a  land  tax  is  no  tax 
at^all.  Since  it  acts  as  a  rent  charge  capitalized  in  the  de- 
creased value  of  the  land,2  they  argue,  a  land  tax  involves  a 
confiscation  of  the  property  of  the  original  owner.  On  the 
other  hand,  since  the  future  possessors  would  otherwise  go 
_scot_free,  it  becomes  necessary  to  levy  some  other  kind  of  a 
tax  on  them.3 

In  France  we  find  the  theory  expressed  in  part  by  J.-B. 
Say,  although  he  does  not  draw  the  same  conclusions.4  The 

1  "  As  the  free  rent  of  land  will  be  diminished  by  the  tax,  the  price  of  each 
estate  will  proportionally  decline.     If  the  nett  rent  be  reduced  by  a  tax  of  4  sh. 
in  the  pound,  from  ,£100  to  j£8o  a  year,  the  estate  which  was  formerly  worth 
^3,000  will  no  longer  sell  for  more  than  ^2,400.     A  proprietor  therefore,  who 
wishes  to  dispose  of  his  land,  will  at  once  be  deprived  of  one-fifth  of  his  property. 
Instead  of  paying  £20  a  year  during  his  possession,  and  leaving  this  annual  pay- 
ment as  a  burden  on  the  lands,  he  finds  himself  obliged  to  pay  £600  the  value  of 
the  tax  forever,  while  his  successor  is  exempted  from  all  contribution."  —  Elements 
of  Political  Science.     By  John  Craig,  Esq.     Edinburgh,  1814,  vol.  iii,  p.  38. 

2  The  Germans  call  the  rent-charge  theory  "  Die  Reallast-theorie  der  Grund- 
steuer." 

3  "  Alle  und  jede  fixirte  Grundsteuern  miissen  sonach  im  Fortgange  der  Zeit 
und  im  Verkehre  mit  Grundstiicken  die  Natur  der  Steuern  ganzlich  verlieren  und 
sich  in  Staatsrenten  verwandlen."  —  Theorie  und  Politik  der  Besteuerung.     Von 
Dr.  Karl  Murhard.     Gottingen,  1834,  p.  295.     Cf.  p.  327.     For  the  necessity  of 
laying  new  taxes  on  future  holders  see  ibid.,  p.  366.     Cf.  similar  passages  in  Die 
Lehre  von  den  Steuern  als  Anleitung  zu  griindlichen  Urtheilen  iiber  das  Steuer- 
ivescn.     Vorgetragen  von  J.  G.  Hoffmann.     Berlin,  1840,  p.  no.     See  also  Ueber 
die  gleiche  Besteuerung  des  Konigsreichs  Hanover.     Von  Georg  Friedrich  Sar- 
torius.     Gottingen,    1815,   p.  92.      See   also    Theorie   der   Steuern   und  Zolle. 
Von  Moriz  v.  Prittwitz.     Stuttgart,  1842,  p.  132. 

4  Traite   d*  Economic  Politique  ou  simple  Exposition  de  la  Manure  dont  se 
forwent,  se  distribuent  et  se  consomment  les  Richesses.     Par  Jean-Baptiste  Say. 
Paris,  1802,  book  iii,  chap,  x;   8th  ed.,  1876,  p.  565  :  "  Le  proprietaire  ne  peut, 
meme  par  la  vente  de  son  fonds,  se  soustraire  au  fardeau  de  1'impot :  car  le  fonds 
n'est  paye  en  principal  qu'en  proportion  de  ce  que  1'impot  lui  laisse  valoir  en 


140          Shifting  and  Incidence  of  Taxation 

doctrine  is  most  clearly  expounded,  however,  in  the  work  of 
Destutt  de  Tracy,  who  makes  the  "  singular  and  important 
observation  "  that  when  a  tax  is  laid  on  land,  a  value  equal  to 
the  capital  of  the  tax  is  at  once  taken  from  the  actual  propri- 
etors, and  that  when  all  have  changed  owners,  it  is  really  no 
longer  paid  by  any  one.  It  is  worthy  of  note  that  Tracy 
applies  his  doctrine,  also,  to  taxes  on  houses  and  on  annui- 
ties.1 Several  decades  later  the  capitalization  theory  was 
most  elaborately  defended  by  Passy,  who  has  often,  but 
erroneously,  been  deemed  the  real  founder  of  the  doctrine. 
Since  his  time  the  doctrine  has  generally  been  known  in 
France  as  the  theory  of  the  immutability  of  the  land  tax 
(Thtorie  de  la  fixitt  de  rimpof).  Passy  drew  the  logical  con- 
clusion that  the  rate  of  the  tax  ought  never  to  be  changed. 
To  increase  it  would  be  to  confiscate  the  property;  to  reduce 
it  would  be  to  make  a  free  gift  of  the  capitalized  value  of  the 
tax  to  the  landowner.2  The  theory  has  been  accepted  by 
several  other  French  economists.  Thus,  Gamier  maintains 
that  a  tax  on  land  is  really  an  expropriation  of  the  original 


revenu.  .  .  .  C^est  comme  si  le  gouvernement  prenait  un  cinquieme  de  la  terre." 
In  a  work  subsequently  published  by  Craig,  Remarks  on  Some  Fundamental 
Doctrines  in  Political  Economy,  Edinburgh,  1821,  he  calls  attention  to  the  fact 
that  Say  entertained  many  of  his  views  on  taxation,  although  neither  had  seen  the 
work  of  the  other. 

1  Elements  d' Ideologic.     Par  Comte  A.  L.  C.  Destutt  de  Tracy.     Paris,  1804* 
This  was  reprinted  in  1823  under  the  title  of  Traite  d' Economic  Politique.     Cf. 
the  American   translation   by  Thomas  Jefferson,  under   the  title  A  Treatise  on 
Political  Economy.     By  the  Count  Destutt  Tracy.    Translated  from  the  unpub- 
lished French  Original.     Georgetown,  D.C.,  1817,  pp.  207-210. 

2  "  Une  remarque  essentielle,  en  ce  qui  concerne  1'impot  territorial,  c'est  qu'il 
finit   par   ne   plus   etre   constitue  2t  titre  veritablement  onereux   pour  ceux  qui 
1'acquittent.    Get  effet  result  e  des  transmissions  do.nt  la  terre  est  1'objet.  .  .  .    On 
ne  peut  clever  le  taux  de  1'impot  sans  rivir  aux  proprietaires  non  seulement  une 
portion  des  revenus  dont  ils  jouissent,  mais  encore  du  capital  meme  du  nouveau 
tribut  annuel  mis  a  leur  charge.     On  ne  peut,  au  contraire,  abaisser  ce  taux  sans 
leur  faire  don  d'une  rente  appartenant  a  1'etat,  et  en  meme  temps  du  capital  de 
cette   me'me   rente."  —  Hippolyte   Passy,   article    "  Impot "  in   Dictionnaire  de 
VEconomic  Politique,  Paris,   1852,  p.  902.     Denis,  DImpbt,   1889,   161,  errs  in 
ascribing  the  origin  of  the  doctrine  to  Passy.     Pantaleoni,  Teoria  della  Trasla- 
zione  dei  Tributi,  1882,  p.  173,  seems  to  make  the  same  mistake. 


The  Capitalization   Theory  141 

owner,  to  the  manifest  advantage  of  the  future  proprietors.1 
We  find  the  same  ideas  in  Wolowski,  Du  Puynode,  Cherbu- 
liez  and  Walras.2  The  real  weakness  of  their  arguments 
has,  moreover,  not  been  perceived  by  subsequent  French 
writers.  Parieu,  who  was  himself  not  very  clear  on  the  gen- 
eral subject,  shows  merely  that  the  doctrine  of  immutability 
necessarily  leads  to  the  English  idea  of  the  redeemable 
rent  charge.3  Even  Leroy-Beaulieu,  although  he  terms  it 
a  "  remarkably  ingenious  theory,  with  all  the  appearance  of 
great  scientific  precision,"  simply  objects  that  it  is  "  much  too 
absolute,"  without  going  to  the  pith  of  the  controversy.4  The 
doctrine  itself  probably  attained  its  extreme  form  in  the 
statement  of  the  Austrian  economist,  Stein,  that  this  ques- 
tion is  the  most  important  in  the  whole  domain  of  taxation, 
and  that  the  land  tax  ought  never  to  be  increased.5 

In  England  the  .theory  has  seemed  to  derive  some  support 
from  the  fact  that  the  land  tax  is  indeed  a  redeemable  rent 

1  "  Un  impot  foncier,  quand   on  1'etablit,  est  une  sorte  d'expropriation  du 
proprietaire  pour  une  certaine  partie  de  son  fonds;  mais  1'acheteur  qui  lui  succede 
paye  la  terre  en  consequence  et  lie  subit  plus  1'impot."  —  Les  Elements  des  Finances. 
Par  Joseph  Gamier.    Paris,  1858.    4th  ed.,  1885,  under  title  of  Traite  de  finances, 
pp.  100,  103. 

2  "  Tout  accroissement  de  1'impot  direct  sur  la  propriete  ne  porte  que  le  nom 
d'impot :  il  est  en  realite  une  confiscation  partielle  deguisee  sous  une  apparence 
trompeuse."  —  Wolowski,  in  the  Journal  des  Economistes,  1866,  iv,  p.  141.     Cf. 
De  la    Monnaie,  du  Credit,  et  de  rimpbt.     Par  Gustave  du  Puynode.     Paris, 
1853,  ii,  p.  171.     See  also  Precis  de  la  Science  Economique,  et  de  ses  Principales 
Applications.     Par  A.-E.  Cherbuliez.     Paris,  1862,  ii,  p.  437.     See  also  Elements 
d"1  Economic  Politique  Pure,  ou  Theorie  de  la  Richesse  Sociale.     Par  Leon  Walras. 
3d   ed.,   Lausanne,    1896,  pp.  452-454;     and  the   same  author's   earlier  work, 
Theorie  Critique  de  VImpbt,  1861,  p.  34. 

3  "  Cette  immutabilite  n'est  meme  que  la  timide  premisse  de  sa  rachetabilite." 
—  Traite  des  Impbts    consider  es  sous    le  Rapport  Historique,   Economique  et 
Politique.     Par  M.  Esquirou  de  Parieu.     Paris,  1862.     2d  ed.,  1866,  i,  p.  273. 

4  Traite  de  la  Science  des  Finances.     Par  Paul  Leroy-Beaulieu.     Paris,  1876. 
5th  ed.,  1892,  i,  p.  319. 

5  "  Im  Allgemeinen  ist  nun  kein  Zweifel,  dass  eine  solche  Erhohung  im  ganzen 
Gebiete  der  Besteuerung  die  ernsteste  und  wichtichste  Frage  ist  welche  uberhaupt 
hier  vorkommen  kann  .  .  .     Das  allgemeine  Princip  daher  muss  sein  .   .  .  dass 
die  Grundsteuer  niemals  erhoht  werden  darf."  —  Lehrbuch  der  Finanzwissenschaft. 
Von  Lorenz  von  Stein.     4th  ed.,  1878,  ii,  p.  55.     In  the  5th  ed.,  1886,  this  passage 
is  omitted.     Cf.  ii,  pp.  103-105. 


142  Shifting  and  Incidence  of  Taxation 

charge.  This,  however,  is  owing  to  the  peculiar  circum- 
stances of  the  case.  The  English  land  tax,  which  was  origi- 
nally a  general  property  tax,  came  to  be  considered  a  fixed 
and  invariable  tax  of  four  shillings  in  the  pound.  In  1798  it 
was  made  perpetual  at  that  rate,  and  the  landowners  were 
given  the  privilege  of  redeeming  it,  that  is,  to  free  the  land 
from  taxation  by  paying  a  certain  lump  sum  by  way  of  com- 
position. In  England,  therefore,  the  land  tax  is  a  redeem- 
able rent  charge  only  because  expressly  made  so  by  statute. 
This  is  what  led  Gregg  to  maintain  that  the  land  tax  was  not 
a  burden  upon  the  land,  because  the  state  had  become  a 
permanent  proprietor  jointly  with  the  owner  of  the  estate. 
It  also  led  Senior  to  express  the  same  views  in  distinguishing 
between  the  incidence  of  a  new  tax  and  that  of  a  fixed  per- 
manent land  tax.1  To  draw  any  general  conclusions  as  to 
the  incidence  of  taxation  in  general  from  these  peculiar 
conditions  would,  however,  be  inadmissible.  The  inference 
that  it  is  always  wrong  to  impose  a  new  tax  or  to  increase  an 
old  tax  on  land  would  be  especially  unjustifiable.  The  truth 
of  the  matter  is  that  the  whole  theory  applies  to  the  land  tax 
only  where  it  is  the  sole  tax  levied.  Furthermore,  it  is  not 
at  all  peculiar  to  the  land  tax. 

The  truth  of  the  latter  part  of  this  statement  was  already 
recognized  in  the  eighteenth  century  by  Young,  who  con- 
tended that  the  argument  as  to  land  taxes  is  equally  applica- 
ble to  "the  house  tax,  the  window  tax,  and  all  others  that 
affect  heritable  property."2  A  step  further,  however,  was 
taken  by  Craig — a  fact  that  seems  to  have  escaped  the 
attention  of  succeeding  economists;  for  he  expressly  tells 
us  that  his  theory  holds  good  only  in  case  "  a  land  tax  be 
imposed  without  an  equivalent  duty  on  every  other  species 
of  property."  Craig  further  contends  that  exclusive  taxes  in 
general,  like  exclusive  taxes  on  land,  fall  ultimately  on  the 
present  proprietors  of  that  species  of  property  which  is 

1  Select  Committee  of  the  House  of  Lords  on  the  Land  Tax.    London,  1846, 

qu.  5379-55 I0- 

2  Essays,  etc.     By  John  Young.    1794,  p.  125.   For  full  title,  see  above,  p.  124. 


The  Capitalization  Theory  143 

taxed.1  John  Stuart  Mill  entertained  practically  the  same 
opinion,  although  he  did  not  work  out  his  theory,  but  con- 
tented himself  with  asserting  that  a  "peculiar  tax  on  the 
income  of  any  class,  not  balanced  by  taxes  on  other  classes, 
is  a  violation  of  justice,  and  amounts  to  a  partial  confisca- 
tion."2 

The  other  English  writers  have  had  little  to  say  about  the 
theory.  Dudley  Baxter,  however,  discusses  the  "strange 
theory"  of  the  rent  charge,  as  applied  to  the  land  tax,  the 
poor  rate  and  the  succession,  probate  and  legacy  duties. 
Although  he  professes  to  discover  three  fallacies  in  the 
argument,  none  of  his  objections  really  goes  to  the  root  of 
the  matter.3  Noble,  in  his  chapter  which  deals  solely  with 
the  broad  facts  of  incidence,  mentions  the  rent-charge  theory 
only  in  connection  with  the  land  tax.4  Professor  Sidgwick, 
who  sees  that  the  rent-charge  theory  applies  only  to  a 
special  tax  on  land,  restricts  the  doctrine  to  "  any  particular 
kind  of  durable  wealth,  of  which  the  supply  is  absolutely 
limited."  But  even  he  fails  to  recognize  the  real  scope  of 
the  theory.5 

The  only  French  writer,  in  addition  to  Destutt  de  Tracy, 

1  Elements  of  Political  Science,  iii,  pp.  37,  82-86. 

2  Principles  of  Political  Economy,  book  v,  chap,  iii,  §  2.      In  another  pas- 
sage he  shows  that  an  exclusive  tax  on  "  realized  property  .  .  .  would  fall  ex- 
clusively on  those  who  happened  to  compose  the  class  when  the  tax  is  laid 
on.  .  .   .     Future  buyers  would  acquire  land  and  securities  at  a  reduction  of  the 
price  equivalent  to  the  peculiar  tax,  which  tax  they  would  therefore  escape  from 
paying,  while  the  original  possessors  would  remain  burthened  with  it  even  after 
parting  with  the  property.  ...     Its  imposition  would  thus  be  tantamount  to  the 
confiscation  for  public  uses  of  a  percentage  of  their  property."  —  Ibid.,  book  v, 
chap,  i,  §  3. 

3  The  Taxation  of  the  United  Kingdom.     By  R.  Dudley  Baxter,  M.A.     Lon- 
don, 1869,  pp.  50-55. 

4  National  Finance  :  A  Review  of  the  Policy  of  the  last  two  Parliaments,  and 
of  the  Results   of  modern  fiscal  Legislation.     By  John  Noble.     London,  1875, 
pp.  282.      Cf.  the  same   author's   The  Queen's   Taxes:    An  Inquiry  into  the 
Amount,  Incidence,  and  Economic  Results  of  the  Taxation  of  the  United  Kingdom. 
London,  1870,  p.  146. 

5  The  Principles  of  Political  Economy.     By  Henry  Sidgwick.     London,  1883, 
p.  569. 


144          Shifting  and  Incidence  of  Taxation 

who  attempted  to  generalize  the  conception  of  the  capitaliza- 
tion of  incidence  was  Cournot.  He  expounded  the  theory 
at  an  early  period,  although  in  other  words.  Above  all, 
Cournot  applied  it  only  to  articles  subject  to  the  law  of  mo- 
nopoly;1 he  drew  no  general  conclusions  from  the  theory. 

It  was  reserved  for  the  German  economists  to  give  to  the 
capitalization  theory  a  more  adequate  presentation.  The 
earliest  writer  to  discuss  it  more  fully  was  Rau,  who  showed 
that  the  theory  was  not  entirely  true  of  the  land  tax.  In  the 
first  place,  says  he,  the  original  owners  or  their  heirs  often 
retain  possession,  so  that  there  may  be  no  chance  for  a 
diminution  of  the  capital  value  through  purchase  and  sale. 
Secondly,  the  value  of  land,  he  thinks,  is  fixed  not  alone  by 
the  net  produce,  but  sometimes  by  other  factors,  such  as  a 
change  in  the  demand  or  in  the  rate  of  interest.  In  such  a 
case,  it  cannot  be  said  that  the  new  purchaser  does  not  feel 
the  tax,  because  it  is  difficult  for  him  to  realize  clearly  that  he 
paid  less  for  the  land  on  account  of  the  tax.  So  far  as  the 
theory  is  true,  it  applies  only  to  so  much  of  the  land  tax  as 
exceeds  the  usual  rate  of  taxes  on  other  commodities.  Above 
all,  he  concludes,  the  same  argument  is  applicable  to  every 
tax  levied  on  objects  of  varying  value  capable  of  sale  — 
whether  houses,  stocks,  bonds,  or  other  capital.2 

Other  writers,  such  as  Helferich  and  Hock,  developed  the 
doctrine,3  and  it  has  recently  been  clearly  expounded  by 

1  "  On  peut  meme  dire  que  cet  impot  [fixed  or  proportional  to  net  profits]  ne  fait 
tort  qu'aux  premiers  possesseurs,  aux  inventeurs  et  en  general  a  ceux  qui  jouissaient 
du  fonds  productif  au  moment  de  1'etablissement  de  1'impot,  et  a  leur  successeurs  a 
titre  gratuit.     Car  les  successeurs  a  titre  onereux  reglent  leur  prix  d'acquisition  sur 
le  produit  net,  defalcation  faite  de  1'impot;  et  si  le  fonds  vient  a  e"tre  degreve  entre 
leurs  mains,  c'est  pour  eux  une  veritable  epave." — Reckerches  sur  les  Principes 
Mathematiques  de  la  Theorie  des  Richesses.     Par  Augustin  Cournot.     Paris,  1838, 

P-  75- 

2  Grundsaize  der  Finanzwissenschaft.     Von  Karl  Heinrich  Rau.     Heidelberg, 
1832.     5th  ed.,  1865,  ii,  pp.  22-27. 

3  "  Ueber  die  Einfuhrung  einer  Kapitalsteuer  in  Baden."    Von  Johann  A.  R. 
von   Helferich.     In  Tiibinger    Zeitschrift  fur  die  gesammte  Staatswissenschafty 
1846,  pp.  291  et  seq.     Cf.  Die  offentlichen  Abgaben  und  Schulden.     Von  Dr. 
Carl  Freiherrn  von  Hock.     Stuttgart,  1863,  pp.  in  et  seq. 


The  Capitalization  Theory  145 

Schaffle.1  The  latter  would  naturally  be  expected  to  enlarge 
the  rent-charge  doctrine  into  a  general  theory  of  capitali- 
zation, because  of  his  doctrine  of  the  universality  of  the  rent 
principle  —  the  doctrine  lately  made  familiar  to  English 
readers,  which  asserts  that  the  theory  of  rent  is  not  confined 
to  land  but  is  applicable  to  profits  as  well.2  Since  ScharHe 
emphasized  this  doctrine,  the  capitalization  theory  has  been 
accepted  by  Pantaleoni 3  in  Italy,  and  by  Pierson  4  in  Holland. 
But  they  all  fail  to  notice  some  of  the  qualifications  which 
will  be  mentioned  in  the  second  part  of  this  inquiry.  We 
have  been  concerned  here  merely  with  the  history  of  the  idea. 
The  doctrine  itself,  in  its  modern  form,  constitutes  a  part  of 
the  general  theory  of  incidence  to  be  discussed  hereafter.5 

1  Schaffle,  in  the  book  quoted  in  the  next  note,  and  also  in  Die  Steuern, 
Allegemeiner  Theil.     Leipzig,  1895,  §  2I2* 

2  Schaffle,  Die  Grundsdtze  der  Steuerpolitik  und  die  schwebenden  Finanzfragen. 
Von  Dr.  Albert  E.  Fr.  Schaffle.     Tubingen,  1880,  pp.  176,  187,  190.     Schaffle's 
general  theory  of  rent  and  profits  was  first  published  in  1867,  in  his  National- 
okonomische   Theorie  der  ausschliessenden  Absatzverhaltnisse.     The  theory  was 
outlined  as  early  as  1855  by  Mangoldt  in  his  Die  Lehre  vom  Unternehmergewinn. 

3  Pantaleoni,  Traslazione  dei  Tributi,  p.   179,  chides  Schaffle  for  not  giving 
credit  to  Rau.    But  he  seems  to  forget  that  Craig  preceded  both   Rau  and 
Schaffle. 

4  Leerboek  der  Staatshuishoudkunde.     Door  Mr.   N.   G.   Pierson.     Haarlem, 
1890,  ii,  pp.  391-409 :  "  Amortisatie  van  Belastingen." 

5  See  below,  part  ii,  chap,  i,  sec.  I. 


.     CHAPTER  V 
THE  ECLECTIC  THEORY 

THE  absolute  theory,  as  well  as  the  equal-diffusion  theory, 
soon  met  with  considerable  opposition.  Most  of  the  oppo- 
nents, however,  have  confined  themselves  to  criticism  and 
to  the  elaboration  of  a  few  special  points.  Their  doctrines 
may  be  summed  up  under  the  head  of  the  eclectic  school. 

One  of  the  first  who  attempted  to  show  the  weakness  of 
both  Canard  and  Ricardo  was  J.-B.  Say.  According  to  him, 
a  tax  on  any  article,  when  followed  by  a  rise  in  price,  falls  on 
the  consumer  only  in  part ;  for  increased  price  means  dimin- 
ished consumption,  and  smaller  demand  means  lower  profits. 
Thus,  even  here,  he  concludes,  the  producer  will  bear  a  part 
of  the  tax.  The  tax  is  like  the  powder  that  affects  both  the 
ball  which  it  propels  and  the  cannon  which  it  causes  to 
recoil.1  Its  effects  are  not  felt  wholly  by  the  consumer  —  it 
never  increases  price  by  the  full  amount  of  the  tax. 

When  the  price  of  the  article  does  not  rise,  Say  continues, 
the  producer  bears  the  whole  tax.  But  everything  depends 
on  whether  the  article  is  a  necessary  or  a  luxury.  If  the  tax 
is  levied  on  raw  materials,  for  example,  it  affects  more  or  less 
the  prices  of  all  other  products.  Direct  taxes  on  producers, 
in  the  same  way,  affect  consumers  very  unequally.  As  the 
doctrine  of  the  transferability  of  capital  is  far  more  true  of 
circulating  than  of  fixed  capital  or  of  land,  there  is  no  such 
thing  as  an  equality  of  profits ;  and  therefore  the  producers 
of  some  commodities  can  shift  the  burden  more  easily  than 

1  "C'est  1'effort  de  la  poudre  qui  agit  a  la  fois  sur  le  boulet  qu'elle  chasse  et  sur 
le  canon  qu'elle  fait  reculer."  —  Traite  d'£conomie  Politique.  Par  J.-B.  Say. 
Paris,  1802,  book  iii,  chap,  x;  8th  ed.,  1876,  p.  562. 

146 


The  Eclectic   Theory  147 

others.  Moreover,  Canard's  analogy  between  the  imposition 
of  taxes  and  the  cupping  of  the  arm  is  misleading ;  for  the 
wealth  of  society  is  not  a  fluid  seeking  its  own  level.  It  may 
rather  be  likened  to  a  tree,  one  of  whose  branches  may  be 
killed  without  mortally  wounding  the  tree;  although  the 
richer  the  branch,  the  greater  the  danger  to  the  whole  tree. 
But  an  analogy,  however  good,  is  not  a  proof.  Hence,  con- 
cludes Say,  it  is  rash  to  affirm  that  a  particular  tax  falls 
definitely  on  a  certain  class.  Taxes  fall,  varying  with  the 
tax  or  with  the  state  of  the  market,  on  those  who  cannot 
escape  them;  but  the  methods  of  escape  are  numberless. 
Nothing  is  more  uncertain,  nothing  more  variable,  than  the 
incidence  of  taxation.1  The  writers  of  the  abstract  school 
reason  on  assumptions  to  which  the  every-day  facts  give 
the  lie. 

On  the  other  hand,  Say  immediately  follows  this  statement 
with  the  assertion  that  a  landowner  can  never  shift  a  tax  to 
the  consumers  —  a  statement  which  seems  to  be  quite  as  ab- 
solute as  those  against  which  he  directs  his  arguments.  The 
land  tax,  he  argues,  will  remain  on  the  landowner,  because 
the  tax  cannot  normally  affect  the  products ;  and,  since  the 
supply  does  not  change,  the  price  cannot.  But  still,  Say  con- 
cludes, it  is  impossible  to  lay  down  any  detailed  principles  of 
incidence.  In  a  machine  so  complicated  as  that  of  society, 
taxes  are  paid  in  many  an  elusive  form.2 

Another  vigorous  opponent  of  Ricardo  was  Sismondi.  Sis- 
mondi  starts  out  by  asserting  that  in  the  case  of  taxes  on  arti- 

1  "  On  voit  combien  il  est  temeraire  d'affirmer  comme  un  principe  general  que 
tout  impot  tombe  definitivement  sur  telle  classe  de  la  societe,  ou  sur  telle  autre. 
Les  impots  tombent  sur  ceux  qui  ne  peuvent  pas  s'y  soustraire  .  .  .  mais  les 
moyens  de  s'y  soustraire  varient  a  1'infini.  .  .  .     Rien  n'est  plus  incertain,  rien  n'est 
plus  variable  que  les  proportions  suivant  lesquelles  les  diverses  classes   de  la 
societe  supportent  1'impot."  —  Ibid.,  p.  566.    It  is  remarkable  that  Say  has  usually 
been  regarded  by  English  and  American  writers  as  an  exponent  of  the  equal-dif- 
fusion theory.     In  reality,  he  was  one  of  its  chief  opponents.     President  Walker 
had  already  called  attention  to  this  fact.     See  his  Political  Economy,  3d  ed., 
§608. 

2  "  Dans  une  machine  sociale  un  peu  complique'e,  1'impot  s'acquitte  sous  bien  des 
formes  inapersues." — Ibid.,  p.  562,  note. 


148  Shifting  and  Incidence  of  Taxation 

cles  of  consumption,  one  can  never  say  beforehand  by  whom 
they  will  be  borne,  because  of  the  complexity  of  the  conditions 
of  the  market.  He  discusses  the  "  abstractions  "  of  Ricardo, 
and  especially  his  theory  of  taxes  on  raw  produce  and  wages. 
Sismondi  fulminates  eloquently  against  the  doctrines  of  the 
absolute  equality  of  wages  and  of  profits,  and  of  the  com- 
plete transferability  of  labor  and  capital — the  corner-stone  of 
Ricardo's  theory.  "  What!  "  asks  Sismondi,  "  are  the  farmers 
to  become  lawyers,  or  doctors,  or  clockmakers  because  their 
wages  have  been  reduced  ?  Will  the  laborers  with  horny 
hands  and  robust  bodies  all  leave  their  fields  and  shut  them- 
selves up  in  the  factories  until  agricultural  wages  have  again 
risen  ?  Beware  of  this  dangerous  theory  of  equilibrium.  Be- 
ware of  thinking  it  a  matter  of  indifference  where  the  burden 
is  put.  Beware  of  believing  that  if  we  tax  necessaries  of 
life,  the  poor  will  shift  the  burden  on  to  the  rich :  A  certain 
equilibrium  will  indeed  be  attained  in  the  long  run,  but  after 
the  most  frightful  sufferings.  Before  it  is  established,  the 
failures  of  the  merchants,  who  must  abandon  their  industry, 
will  have  caused  the  nation  more  loss  than  all  the  revenue 
from  taxation ;  the  misery  and  suffering  of  the  laborers  will 
have  cost  the  nation  more  lives  than  the  most  destructive 
wars.  These  are  the  terrible  methods  of  reestablishing  the 
equilibrium.  It  is  this  that  we  see  when  we  abandon  those 
abstractions  which  never  ought  to  befog  a  science  that  deals 
with  the  happiness  and  welfare  of  men."  In  such  strong 
language  does  Sismondi  endeavor  to  combat  the  theories  of 
the  absolute  school.1  But,  while  Sismondi  is  so  heated  in  his 

1  "  Quoi !  les  cultivateurs  se  feront-ils  avocats  ou  medecins,  ou  bien  horlogers 
ou  mecaniciens,  parce  que  leurs  salaires  ne  leur  suffisent  plus  pour  vivre?  .  .  . 
Les  laboureurs,  dont  le  corps  est  accoutume  au  grand  air,  dont  les  mains  endurcies 
sont  rendues  incapables  de  toute  operation  delicate,  dont  la  sante  requiert  un 
exercice  violent,  dont  I'&me  a  besoin  des  jouissances  des  champs,  s'enfermeront-ils 
dans  une  filature  de  coton  ?  Quoi !  enfin,  parce  qu'un  impot  sur  les  farines  ferait 
monter  le  pain  de  4  a  6  sous  la  livre,  les  laboureurs  quitteraient  les  champs  pour 
venir  s'enfermer  dans  les  villes,  jusqu'a  ce  que  le  salaire  des  ouvriers  des  champs 
fut  porte  plus  haut?  .  .  .  Gardons-nous  de  la  dangereuse  theorie  de  cet  equi- 
libre  qui  se  retablit  de  lui-meme !  Gardons-nous  de  croire  qu'il  soit  indifferent 
dans  quel  bassin  de  la  balance  on  met  ou  Ton  6te  un  poids,  parce  que  les  autres 


The  Eclectic  Theory  149 

criticism,  he  does  not  attempt  any  constructive  work;  he 
even  goes  so  far  as  to  say  that  he  is  unable  to  discover  any 
general  principles. 

Another  French  writer  who  treated  the  subject,  but  in  a 
manner  less  profound  than  some  of  his  successors,  is  Gamier, 
who  contends  that,  in  the  long  run,  taxes  finally  fall  on  the 
consumer.  He  maintains,  however,  that  there  are  many  limi- 
tations which  prevent  the  producer  from  always  shifting  the 
burden  to  the  consumer.  Above  all,  he  denies  that  the  diffu- 
sion of  taxes  leads  to  an  exemption  of  the  taxpayers  :  "  divi- 
sion, diffusion,  and  repercussion  are  unfortunately  not  the 
synonyms  of  evaporation."  1 

A  more  important  writer  is  Parieu.  This  writer's  termi- 
nology is  confusing;  he  continually  confounds  the  words 
"  incidence  "  and  "  shifting,"  and  speaks  of  direct  and  indirect 
incidence.  His  matter,  however,  is  far  better  than  his  form  of 
presentation.  Parieu  criticises  those  who  maintain  that  all 
taxes  are  added  to  the  cost  of  production,  and  thus  distributed 
to  the  consumers.  This  theory  is  false,  and  much  exaggerated, 
cries  Parieu.  If  the  argument  were  sound,  it  would  not  be 
worth  while  to  write  any  books  on  taxation,  or  to  devote  any 

ne  tarderont  pas  a  se  compenser !  Gardons-nous  de  croire  qu'en  chargeant  d'un 
impot  les  objets  de  premiere  necessite,  si  les  pauvres  en  font  1'avance,  les  riches 
finiront  par  le  rembourser !  Un  certain  equilibre  se  retablit,  il  est  vrai,  a  la  longue, 
mais  c'est  par  une  effroyable  souff ranee.  ...  Mais,  avant  que  cet  equilibre  soit 
retabli,  la  faillite  de  tous  les  negociants,  dans  les  branches  d'industrie  qu'il  faudrait 
abandonner,  aurait  enleve  a  la  nation  beaucoup  plus  de  capitaux,  en  pure  perte,  que 
1'impot  n'aurait  rapporte  de  revenus  au  fisc.  De  m£me  la  mortalite  parmi  les 
ouvriers  qui  ne  trouvent  plus  de  gagne-pain,  aurait  enleve  a  la  nation  plus  de  vies 
que  la  plus  desastreuse  campagne.  C'est  par  ces  moyens  terribles  que  la  balance 
politique  se  releve;  et,  lorsqu'on  descend  des  abstractions,  ou  il  ne  faut  jamais 
envelopper  une  science  qui  decide  du  bonheur  et  de  la  vie  des  hommes,  c'est  ainsi 
que  s'opere  le  redressement."  —  Nouveaux  Principes  d^Aconomie  Politique,  ou 
de  la  Richesse  dans  ses  Rapports  avec  la  Population.  Par  J.  C.  L.  Simonde 
de  Sismondi.  Paris,  1819,  book  vi,  chap.  6;  2d  ed.,  Paris,  1827,  ii,  pp.  219- 
223. 

1  Traite  de  Finances.  Par  Joseph  Gamier.  Paris,  1858;  4th  ed.,  1883, 
p.  26.  Gamier  errs,  however,  in  ascribing  this  theory  to  Ricardo.  It  was  the 
theory  of  Canard  and  Thiers,  not  of  Ricardo.  It  is  remarkable  that  Canard  has 
been  almost  completely  neglected  by  the  French  writers  themselves. 


150          Shifting  and  Incidence  of  Taxation 

thought  to  the  matter ;  for,  as  all  taxes  would  be  alike  in  their 
results,  there  would  be  no  choice  between  them.  Parieu  main- 
tains, however,  that  it  is  possible  to  lay  down  one  or  two  gen- 
eral principles,  which  he  formulates  in  this  way :  Taxes  remain 
in  the  first  instance  on  the  original  taxpayer,  if  the  taxable 
commodity  is  not  susceptible  of  restriction  of  supply.  In 
proportion  as  the  supply  can  be  diminished,  the  tax  will  be 
shifted  to  other  classes.  If  the  individual  on  whom  the  tax 
has  been  shifted  is,  in  his  turn,  in  a  position  to  restrict  his 
enjoyments,  he  will  neutralize  in  part  the  effect  of  this  shift- 
ing, and  will  shift  the  tax  either  back  to  the  original  taxpayer 
or  on  to  some  other  class.1 

This  leading  principle  Parieu  applies  to  the  various  kinds 
of  taxes.  There  is  no  doubt  that  he  here  strikes  the  key- 
note of  what  may  be  called  the  quantitative  or  mathematical 
theory,  which  will  be  discussed  later  on.  What  Parieu  says 
is  true,  as  far  as  it  goes,  and,  rightly  interpreted,  furnishes  a 
clue  to  many  of  the  difficulties  of  the  subject;  but  Parieu 
devotes  only  a  few  pages  to  the  whole  topic  and  makes  no 
effort  to  get  beyond  vague  generalizations.  He  concludes 
that,  as  a  general  rule,  "the  imposition  of  taxes,  except  in 
the  case  of  taxes  on  commodities  levied  wholesale  on  the 
producer,  cannot  be  regarded  as  producing  a  shifting  which 
completely  inverts  the  first  natural  effects  of  the  tax.  In 
most  cases,  the  whole  or  the  greater  part  of  the  tax  remains 
on  him  who  pays  it  actually  or  ostensibly  in  the  first  or 
second  degree  of  the  incidence."2  Although  he  did  not 

1  "  L'impot  reste,  au  moins  immediatement,  a  la  charge  de  celui  qui  le  paye, 
si  1'objet  sur  lequel  il  est  assis  n'est  pas  susceptible  du  restriction.    II  est  rejete  en 
tout  ou  partie  sur  d'autres  contribuables,  si  1'objet  sur  lequel  il  est  assis  est  sus- 
ceptible de  restriction,  et  la  repercussion  de  1'impot  est  en  raison  meme  de  la 
facilite  de  cette  restriction.     Si  celui  sur  lequel  1'impot  est  reflechi  est  a  son  tour 
en  etat  de  reserrer  la  jouissance  a  1'occasion  de  laquelle  il  recoit  le  contre-coup  de 
la  taxe,  il  neutralisera  en  partie  1'effet  de  la  repercussion  de  1'impot  en  la  rejetant, 
soit  sur  le  contribuable  primitif,  soit  sur  d'autres."  —  Traite  des  Impbts,  consider'es 
sous  le  Rapport  Historique,  Economique  et  Politique.     Par  M.  Esquirou  de  Parieu. 
Paris,  1862;  2d  ed.,  1866,  i,  p.  68. 

2  "  L'incidence  des  taxes  ne  peut  etre  consideree  comme  realisant,  si  ce  n'est 
pour  les  denrees  frappees  en  gros  chez  les  producteurs,  une  reflexion  completement 


The  Eclectic  Theory  151 

grasp  the  whole  subject,  and  did  not  even  develop  his  own 
principle  successfully,  Parieu  deserves  more  than  a  passing 
notice  as  pointing  out  one  of  the  most  important  elements  in 
the  solution  of  the  problem. 

The  other  French  writers  have  not  contributed  materially 
to  the  solution  of  the  problem.  Thus,  the  work  of  Du 
Puynode  is  voluminous  but  not  very  critical.  He  makes  the 
whole  subject  extremely  simple.  According  to  his  theory, 
taxes  on  land  as  well  as  those  on  houses  are  ordinarily  borne 
by  the  owners :  "  all  the  imaginary  distinctions  of  Smith  and 
Ricardo  are  without  foundation."1  Taxes  on  personal  prop- 
erty or  profits,  he  contends,  are  always  shifted  to  the  con- 
sumer; while  taxes  on  wages  always  rest  on  the  laborer  by 
whom  they  are  paid  in  first  instance.2  It  is  easy,  of  course, 
to  solve  the  problems  in  this  way. 

The  volumes  of  Vignes  are  important  in  the  study  of  many 
other  aspects  of  taxation,  but  his  treatment  of  incidence  is 
not  especially  noteworthy,  except  for  the  fact  that  he  opposes 
both  the  theory  of  "scepticism"  and  that  of  "equal  diffu- 
sion."3 He  deals,  however,  mainly  with  special  taxes,  and 
does  not  seem  well  acquainted  with  the  literature.  Some  of 
his  views  are  interesting  and  will  be  noticed  later. 

Finally,  Leroy-Beaulieu,  in  his  comprehensive  treatise  on 
public  finance,  skims  over  the  general  problem.  We  do, 
indeed,  find  a  few  strong  passages  scattered  through  the 
volume,  but  only  in  connection  with  special  points.4  While 
admitting  that  there  is  a  certain  element  of  truth  in  the 

destructive,  des  premiers  effets  naturels  de  1'imposition.  Dans  la  plupart  des  cas, 
tout  ou  partie  de  la  charge  reste  reellement  imposee  sur  celui  qui  supporte  visible- 
ment  et  ostensiblement  dans  le  premier  ou  le  second  degre  de  son  incidence."  — 
Ibid.,  p.  83. 

1  De  la  Monnaie,  du  Credit  et  de  VImpbt.     Par  Gustave  du  Puynode.     Paris, 
1853,  ii,  p.  175. 

2  Ibid.,  ii,  pp.  215,  321,  365. 

8  Traite  des  Impbts  en  France.  Par  M.  Edouard  Vignes.  4th  ed.,  by  Vergni- 
aud.  Paris,  1880,  ii,  pp.  68,  97,  118,  and  173. 

4  Traite  de  la  Science  des  Finances.  Par  Paul  Leroy-Beaulieu.  5th  ed., 
1892,  i,  pp.  180,  413,  and  769-771.  In  his  recent  Traite  Theorique  et  Pratique 
d*  Economic  Politique,  2d  ed.,  1896,  Leroy-Beaulieu  devotes  several  pages  to  the 


152          Shifting  and  Incidence  of  Taxation 

"general  repercussion"  doctrine,  he  warns  his  readers  against 
placing  too  much  reliance  on  it.  We  search  through  his 
works  in  vain  for  anything  constructive. 

In  Germany  we  find  more  noteworthy  contributions  to  the 
subject.  The  early  German  writers  on  public  finance  — 
such  as  Soden,  Jakob,  Fulda,  Malchus,  Biersack  and  Mur- 
hard — may  be  passed  over  as  comparatively  insignificant. 
They  certainly  made  no  definite  impression  on  the  course  of 
the  theory.1  One  of  the  early  Germans,  von  Thiinen,  must, 
however,  be  mentioned  because  of  his  prominence  in  other 
domains  of  economic  science. 

Von  Thiinen  devotes  only  a  small  portion  of  his  remark- 
able work  to  the  problem  of  taxation,  and  there  discusses 
principally  the  incidence  of  the  land  tax.  But  his  doctrine  is 
worth  noticing  as  showing  how  the  equal-diffusion  theory, 
logically  developed,  results  in  an  absurdity.  "  It  would  seem 
then,"  he  says,  "that  the  state  can  increase  its  taxes  to  any 
conceivable  extent,  without  harming  the  community,  since 
every  active  citizen  would  bear  the  tax  only  nominally  if  he 
were  simply  to  advance  the  tax  without  paying  it  in  last 
instance.  But  this  remarkable  conclusion,"  adds  von  Thiinen, 
"depends  on  the  assumption  that,  after  the  imposition  of 
the  tax,  the  consumption  of  commodities  remains  the  same. 
And  that  is,  of  course,  the  weak  point  of  the  theory."2 

general  topic  (iv,  pp.  791-799),  but  contents  himself  with  a  few  unsatisfactory 
generalizations. 

1  Those  who  desire  to  study  in  detail  the  views  of  these  rather  unimportant 
writers  are  referred  to  the  books  of  Kaizl  and  Falck  (mentioned  above,  p.  3), 
who  deal  especially  with  the  German  authors. 

2  "  Es  scheint  demnach  .  .  .  dass  der  Staat  die  Abgaben  bis  aufs  aiisserste 
erhohen  konne,  ohne  dadurch  das  Wohl  des  Ganzen  zu  gefahrden,  indem  von  alien 
seinen  thatigen  Burgern  kein  Einziger  dadurch  bedriickt  wird,  weil  Jeder  die 
Abgabe  nur  vorschiesst,  nicht  selbst  bezahlt.   .   .   .     Die  Schlfisse,  wodurch  wir 
dieses  sehr  auffallende  Resultat  erhalten,  beruhen  auf  der  Voraussetzung,  dass 
nach  der  Einfiihrung  der  Abgabe  die  Consumtion  dieselbe  bleibt."  —  Der  isolirte 
Staat,  in  Beziehung  auf  Landwirthschaft  und  Nationalokonomie.     Von  Johann 
Heinrich  von  Thiiren.     Hamburg,  1826;   3d  ed.,  Berlin,  1875,  Par^  i»  P-  337-    Cf- 
the  French  translation   by  Laverriere:    Recherches  sur  V influence  que  le  Prix 
des  Grains,  la  Richesse  du  Sol  et  les  Impbts  exercent  sur  les  Systentes  de  Culture. 
Paris,  1851,  p.  292. 


The  Eclectic  Theory  153 

With  Rau,  however,  we  come  to  some  positive  results. 
Rau  lays  down  his  conclusions  in  the  seven  following  prin- 
ciples  :  I.  A  tax  can  be  shifted  only  when  it  induces  the  j 
majority  of  the  taxpayerg-to-a^uftifocrp  mnHnrf, 


|  about  ji  change  in  supply  and  demand.  2.  A  tax  assessed 
on  the  income  of  an  entire  class  cannot  be  easily  shifted  to 
the  vendors  of  certain  goods,  because  the  restriction  of  the 
taxpayers'  expenses  affects  different  commodities  unequally, 
so  that  the  slight  decrease  of  the  demand  will  often  be  coun- 
terbalanced by  a  decrease  of  the  supply.  3.  Taxesjwill  be 
shifted  most  easily  on  the  consumers  when  all  the  sellers 
see  themselves  equally  forced  to  make  good  the  tax  by  de- 
creasing supply,  as  in  the  case  of  customs  duties.  4.  Taxes 
on  classes  with  fixed  incomes,  like  public  officials,  can- 
not possibly  be  shifted.  5.  Taxes  which  are  not  assessed 
according  to  the  quality  of  goods  for  sale  are  less  easily 
shifted  than  others.  6.  In  taxes  on  rent,  on  the  source  of 
profits,  and  on  wages  or  profits,  the  important  consideration 
is  whether  the  taxpayer  can  escape  the  tax  through  a  change 
in  investments.  7.  The  transference  of  taxation  cannot 
excuse  an  unjust  system  of  assessment,  because  (a)  the 
shifting  is  often  more  apparent  than  real,  (b)  if  only  a  few 
taxpayers  are  assessed  too  high  or  too  low,  prices  will  not  be 
affected,  (c)  in  the  interval  many  hardships  are  sure  to  ensue, 
and  (d)  even  a  complete  shifting  of  a  high  tax  is  not  without 
bad  results  because  it  often  diminishes  both  production  and 
consumption.1  These  principles  of  Rau,  as  we  shall  see 
hereafter,  are  of  considerable  help  in  the  investigation  of 
special  problems. 

1  Grundsatze  der  Finanzwissenschaft.  Von  Dr.  Karl  Heinrich  Rau.  Heidel- 
berg, 1832;  5th  ed.,  1864,  iii,  pp.  412-417.  The  sixth  point  reads  as  follows: 
"  Insbesondere  Tkommt  es  bei  Steuern,  die  den  Ertrag  einer  einzelnen  Guterquelle 
zu  treffen  bestimmt  sind,  darauf  an,  ob  der  Besteuerte  durch  eine  anderweitige 
Verwendung  jener  Quelle  oder  andere  Einrichtungen  der  Auflage  ausweichen 
kann.  Dies  wird  in  vielen  Fallen  durch  die  Beschaffenheit  des  werbenden  Ver- 
mogens  verhindert.  .  .  .  Desshalb  bleiben  die  meisten  Steuern  auf  den  Renten 
des  werbenden  Vermogens  liegen,  die  auch  wirklich  den  grossten  Theil  des 
steuerbaren  Einkommens  ausmachen,  oder  werden  noch  auf  sie  hiniibergewalzt." 


154          Shifting  and  Incidence  of  Taxation 

More  important,  and  in  some  respects  the  most  suggestive 
of  the  works  hitherto  considered,  is  the  book  of  von  Hock. 
This  author  was  the  first  to  analyze  and  define  the  various 

>ds  of  shif tings  —  the  shifting  forward,  the  shifting  back- 

ird,  and  the  shifting  off,  terms  to  which  allusion  has  been 
J  /made  in  the  introduction.1  He  maintains  that,  from  the 
/  standpoint  of  the  taxpayer,  the  tax  must  always  be  (i)  a  part 
of  the  cost  of  production  of  the  commodity  taxed,  (2)  a  part 
of  the  general  business  expenses,  (3)  a  part  of  the  cost  of 
subsistence,  or  (4)  a  burden  on  the  net  revenue  or  income. 
Examples  would  be,  respectively,  a  tax  on  the  manufacture  of 
spirits,  a  license  or  business  tax,  a  poll  or  house  tax,  and  an 
income  tax.  In  general,  taxes  of  class  one,  class  two  and 
class  three  —  so  far  as  the  necessaries  of  life  are  concerned  — 
are  virtually  additions  to  the  cost  of  production,  and  thus 
tend  to  be  shifted  to  the  consumer.  But  this  general  rule 
has  many  exceptions,  which  may  be  summed  up  as  follows:2 
(a)  There  will  be  no  shifting  in  general  and  for  a  long  period 
when  the  tax  is  so  high  as  to  produce  a  decrease  of  demand, 
or  a  substitution  of  inferior  products  on  the  part  of  the  con- 
sumer, (b)  There  will  be  no  shifting  temporarily,  when  the 
state  of  the  market  changes  so  that  the  price  of  the  articles 
falls  below  the  price  before  the  tax  was  imposed,  (c)  The 
exceptions  to  the  shifting  of  taxes  on  necessaries  of  life  are 
far  more  frequent  and  dangerous  to  the  laborer  than  the 
above  exceptions  to  the  producer ;  for  wages  vary  frequently, 
and  an  increase  of  price  in  the  necessaries  of  life,  joined  with 
a  low  rate  of  wages,  has  the  most  lamentable  results. 

While  Hock,  therefore,  accepts  in  general  the  cost  of  pro- 
duction theory  of  taxation,  he  is  by  no  means  a  follower  of 
Canard  or  Thiers.  He  confesses  that,  in  the  long  run,  the 
shifting  of  some  taxes  will  produce  an  equilibrium  —  only 
this  is  not  a  fixed  equilibrium,  but  one  that  is  continually  dis- 

1  He  termed  these  "  Fortwalzung,"  "  Ruckwalzung  "  and  "  Abwalzung  "  —  all 
of  them  modes  of  "  Ueberwalzung  "  or  shifting. 

2  Die  offcntlichen  Abgaben  und  Schulden.     Von  Dr.  Carl  Freiherrn  von  Hock. 
Stuttgart,  1863,  pp.  91-96. 


The  Eclectic  Theory  155 

turbed  by  the  conditions  of  the  market  and  is  completely 
overthrown  by  every  important  economic  reform.  Above  all, 
he  adds,  it  is  not  to  be  assumed  that  this  equilibrium  is  neces- 
sarily just,  or  even  beneficial,  from  the  economic  point  of 
view;  for  under  certain  conditions  the  shifting  of  taxation 
may  increase,  and  not  decrease,  the  original  injustice.  The 
optimistic  theory  of  diffusion  is,  then,  utterly  untenable.1 

Prince-Smith  seeks  to  solve  the  problem  in  somewhat  the 
same  way.  He  ridicules  the  diffusion  theory  which  virtually 
maintains  that  the  burden  of  taxation,  like  the  ball  in  the 
game  of  shuttlecock  and  battledoor,  is  continually  thrown 
from  hand  to  hand,  and  always  remains  suspended  in  the 
air  without  ever  falling  on  anybody.2  On  the  contrary,  says 
he,  the  shifting  of  taxation  depends  on  certain  conditions.  It 
can  take  place  only  through  increase  of  price ;  and  increase 
of  price  can  be  due  only  to  increased  demand  or  decreased 
supply.  As  the  producer  cannot  increase  the  demand,  he 
must  reduce  the  supply.  Apart  from  the  question  of  outlets 
in  international  trade,  this  is  possible  only  through  limitation 
of  production  —  that  is,  by  the  transfer  of  capital  and  labor 
to  other  occupations.  The  whole  problem  of  shifting  thus 
reduces  itself  to  the  question:  Which  is  more  injurious  —  to 
bear  the  tax  without  shifting,  or  to  suffer  through  the  limita- 
tion of  production  ?  In  general,  he  concludes,  a  tax  will  be 
shifted  only  when  the  transfer  brings  in  more  than  it  costs. 
In  other  words,  the  whole  question  of  incidence  is,  according 
to  Prince-Smith,  simply  a  question  of  calculation.  Applying 
his  theory  to  practical  cases,  he  thinks  that  the  land  tax  and 

1  "  Es  ist  allerdings  wahr,  dass   die  Uberwalzung  der   Steuern  zulezt   eine 
Ausgleichung  zur  Folge  habe,  allein  das  hierdurch  hergestellte  Gleichgewicht  ist 
ein  labiles,  das  jeden  Augenblick  dutch  die  Schwankungen  des  Marktes  gestort 
und  durch  jede  tiefer  greifende  wirthschaftttche  Reform  ganz  aufgehoben  wird. 
...    Es  kann  unter  gewissen  politischen  und  commerciellen  Vorbedingungen  die 
Steuer  durch  fortgesetzte  Ueberwalzungen  eben  so  leicht  ungerechter  und  scha'd- 
licher  werden  als  das  Gegentheil."  —  Ibid.,  pp.  108,  109. 

2  "  Ueber  die  Abwalzung."     Von  John   Prince- Smith.     In   Vierieljahrschrift 
fur  Volkswirthschaft  und  Kulturgeschichte,  xiii  (1866),  p.  130.     Reprinted  in  his 
Gesammelte  Schriften.     Berlin,  1877,  i,  pp.  43-64. 


156          Shifting  and  Incidence  of  Taxation 

the  house  tax  cannot  be  shifted,  and  that  the  indirect  taxes 
or  taxes  on  wages  can  be  shifted  only  through  the  bankruptcy 
of  the  weakest,  and  that  bankruptcy  of  the  laborer  means 
starvation  and  death.  As  a  protest  against  the  absolute  and 
diffusion  theories,  Prince-Smith  makes  a  strong  case,  although 
some  of  his  own  positions  are  not  always  tenable. 

The  more  recent  German  writers  on  public  finance  have, 
with  few  exceptions,  done  little  to  advance  investigation 
along  these  lines.  For  example,  Roscher  follows  in  the  main 
the  exposition  of  the  older  English  writers.1  Schaffle  deals 
chiefly  with  the  question  of  capitalization.2  Wagner,  even  in 
the  last  edition  of  his  great  work,  bases  his  exposition  pri- 
marily on  the  works  of  Rau  and  Hock,  and  does  not  really 
get  beyond  them.8  Cohn  contents  himself  with  a  few  vague 
generalizations  which  are  of  little  use.4  Vocke  practically 
limits  himself  to  the  statement  that  reliance  on  the  general 
shifting  of  taxes  is  treacherous,  and  that  the  whole  subject 
properly  belongs  to  the  general  economic  doctrine  of  cost  of 
production.5  Von  Schall,  the  author  of  the  latest  monograph 
on  taxation,  devotes  four  and  a  half  pages  to  the  topic  of 
shifting.  We  accordingly  find  in  his  exposition  little  but 
platitudes.6  In  fact,  the  recent  German  literature  is  signifi- 
cant mainly  for  the  fact  that  it  attempts,  sometimes  very 
successfully,  to  evade  the  difficulties  of  the  problem. 

1  System  der  Finanzwissenschaft.    Von  Wilhelm  Roscher.     Stuttgart,   1886, 

§§  38-43. 

2  Die  Grundsatze  der  Steuerpolitik  und  die  Schwebenden  Finanzfragen.     Von 
Dr.  Albert  E.  Fr.  Schaffle.    Tubingen,  1880,  pp.  173-192.     His  most  recent  work 
discusses  the  topic  somewhat  more  broadly,  but  is  somewhat  lacking  in  precision. 
Die  Steuern,  Allgemeiner  Theil,  1895,  drittes  Buch,  I  Haupteintheilung,  IV  Ab- 
schnitt,  3  Kapitel. 

8  Finanzwissenscha.fi.    Von  Adolph  Wagner.     Leipzig,  1880,  ii;  2d  ed.,  1890, 

PP.  332-372. 

4  System    der  Finanzwissenschaft.     Von  Gustav  Cohn.     Stuttgart,   1889,  pp. 
304-311.      English  translation  by  T.  B.  Veblen  under  the  title  of  The  Science  of 
Finance.    Chicago,  1895,  PP-  365~373- 

5  Die  Grundzuge  der  Finanzwissenschaft.    Von  Dr.  Wilhelm  Vocke.    Leipzig, 
1894,  pp.  205-212. 

6  "  Allgemeine  Steuerlehre."    Von  K.  Fr.  v.  Schall.    In  Schonberg's  Handbuch 
der politischen  Oekonomie.     TUbingen,  4th  ed.,  iii,  1897,  pp.  236-240. 


The  Eclectic  Theory  157 

The  English  writers  who  have  not  yet  been  mentioned  may 
be  passed  over  with  a  few  words.  Richard  Jones  was  one  of 
the  first  to  deny  the  Ricardian  doctrine  of  incidence,  as  he 
was  the  first  to  dispute  Ricardo's  theory  of  distribution.  He 
confined  himself  almost  exclusively  to  the  tax  on  wages  and 
that  on  consumable  commodities.  Jones  maintained  that  it 
is  impossible  to  tell  beforehand  the  ultimate  incidence  of  a 
tax  on  wages ;  for  this,  he  said,  depends  upon  the  effect  of 
the  tax  upon  the  movements  of  population.  If  the  tax  were 
laid  on  wages,  under  such  circumstances  that  it  would  not 
affect  the  movement  of  population  but  would  be  met  by  a 
sacrifice  of  secondary  gratifications,  it  would  not  be  shifted. 
Only  under  conditions  the  reverse  of  these  would  the  tax  be 
shifted  from  wages  to  profits.1 

David  Buchanan  had  preceded  Jones  in  controverting  some 
of  Adam  Smith's  doctrines  on  incidence.  He  took  exception 
to  the  distinction  between  the  ground  rent  and  the  building 
rent  in  the  house  tax.2  Above  all,  he  opposed  the  view  that 
a  tax  on  labor  will  produce  a  corresponding  rise  in  wages.  If 
wages  were  always  at  the  bare  minimum  point,  then  indeed, 
he  admitted,  the  doctrine  might  be  true;  but  "while  the 
wages  of  labor  afford  comforts  and  even  luxuries,  the  laborer 
will  always  possess  a  fund  for  the  payment  of  taxes.  .  .  .  All 
taxes  on  labor,  or  on  such  commodities  as  the  laborer  con- 
sumes, take  effect  by  abridging  his  comforts.  They  increase 
the  hardships,  and  tend  generally  to  degrade  the  condition  of 
the  laboring  classes."  3  We  have  already  seen  that  the  argu- 
ment of  Buchanan  induced  Ricardo  to  make  a  qualification  of 
his  rigid  theory.4 

1  "Tract  on  the  Incidence  of  Taxes  on  Commodities  that  are  consumed  by 
the   Laborer."      By  Rev.  Richard   Jones.     In  Literary  Remains,  consisting  of 
Lectures  and  Tracts  on  Political  Economy.     London,  1858,  pp.  143.     Cf.  "A 
Short  Tract  on  Political  Economy,"  ibid.,  p.  277. 

2  An  Inquiry  into  the  Nature  and  Causes  of  the  Wealth  of  Nations.     By 
Adam  Smith,  LL.D.    With  Notes  and  an  Additional  Volume,  by  David  Buchanan. 
Edinburgh,  1817,  iii,  p.  300,  note. 

3  Ibid.,  pp.  338,  339.     See  also  Observations  on  the  Subjects  treated  of  in  Dr. 
Smithes  Inquiry,  etc.     By  David  Buchanan.     Edinburgh,  1817,  2d  ed.,  pp.  59-64. 

*  Above,  p.  119. 


158          Shifting  and  Incidence  of  Taxation 

James  Mill,  although  he  seeks  to  differentiate  the  doctrine 
in  some  points,  is,  on  the  whole,  a  follower  of  Ricardo.  Mill 
maintains  that  a  tax  on  produce  or  on  farmers'  profits  is 
shifted  to  the  consumer.  So,  also,  he  says,  a  tax  on  profits  of 
stock  will  fall  on  profits.  On  the  other  hand,  Mill  accepts 
Ricardo' s  theory  of  the  tax  on  wages,  but  only  on  the  assump- 
tion that  wages  are  at  the  lowest  point  to  which  they  can  be 
reduced.  Otherwise,  he  thinks,  a  tax  on  wages  will  not  be 
shifted  to  profits.1 

Senior  confines  his  discussion  to  a  few  points.  He  agrees 
that  taxes  on  manufactured  commodities  raise  the  price,  gen- 
erally by  a  sum  exceeding  the  amount  of  the  tax.  But  he 
takes  issue  with  Ricardo  in  regard  to  a  tax  on  agricultural 
produce.  Senior  maintains  that,  while  the  immediate  effect 
of  such  a  land  tax  is  to  raise  prices,  its  ultimate  effect  is  to 
diminish  both  the  production  and  the  consumption  of  raw 
produce,  and  therefore  to  leave  its  price  unaffected.  Tithes 
will,  therefore,  not  be  shifted  to  the  consumers.2 

John  Stuart  Mill  keeps,  in  the  main  lines,  to  the  arguments 
of  his  predecessors.  He  assumes  perfectly  free  competition 
and  the  complete  transferability  of  capital,  and  on  these 
assumptions  builds  up  his  whole  superstructure.  He  follows 
Ricardo,  except  in  three  points.  In  the  first  place,  he  accepts 
Senior's  emendation  of  the  doctrine  of  tithes,  that  in  the  long 
run  the  incidence  is  on  the  landowner,  and  not  on  the  con- 
sumer. Secondly,  he  accepts  the  view  of  his  father  as  to  the 
incidence  of  a  tax  on  wages.  Thirdly,  he  analyzes  more 
closely  the  incidence  of  taxes  on  exports  and  imports.3 

McCulloch  displays  independence  in  only  one  point.  A 
special  tax  on  profits,  he  contends,  will  not  necessarily  raise 
prices,  as  Ricardo  thought :  instead  of  being  shifted  to  the 

1  Elements  of  Political  Economy.    By  James  Mill,  Esq.     London,  1821;  3d  ed., 
1844,  chap,  iv,  sec.  v-xiii,  pp.  248-292. 

2  Political  Economy.   By  Nassau  William  Senior.    London,  1835  >  6th  ed-»  l872» 
pp.  120-124. 

8  Principles  of  Political  Economy,  with  some  of  their  Applications  to  Social 
Philosophy.  By  John  Stuart  Mill.  London,  1847,  book  v,  chap,  iv,  §  4;  chap,  iii, 
§  4;  and  chap,  iv,  §  6. 


The  Eclectic  Theory  159 

consumer,  it  may  lead  to  a  reduction  of  cost.  McCulloch 
points  out  that  the  producer  will  endeavor  to  meet  the  press- 
ure of  the  tax,  and  to  defeat  it  by  greater  skill  and  industry, 
by  increased  facility  of  production,  or  by  a  saving  of  expense, 
so  that  the  tax  will  not  continue  to  fall  on  him.  Further- 
more, it  will  not  fall  on  the  consumer.1  In  reality,  however, 
this  doctrine  explains,  not  any  process  of  shifting,  but  what 
was  termed  in  the  introduction  the  "  evasion  "  of  taxation ; 
which  is  a  very  different  thing.  This  idea  of  evasion  may 
accordingly  be  said  to  have  been  introduced  into  scientific 
discussion  by  McCulloch. 

The  treatment  of  the  subject  by  Fawcett  is  remarkable, 
first,  for  the  exaggeration  of  some  of  the  extreme  statements 
of  the  older  economists,  —  as,  for  example,  the  contention 
that  a  tax  on  commodities  raises  prices  far  beyond  the  amount 
of  the  tax  and,  secondly,  for  the  somewhat  vague  ideas  on 
the  incidence  of  local  taxation.2  As  both  these  points  will  be 
fully  treated  later,  we  may  omit  them  here. 

An  interesting  criticism  of  the  older  theories  is  to  be  found 
in  the  work  of  Cliffe-Leslie.  This  able  writer  pointed  out 
that  the  older  conclusions  were  frequently  too  rigid.  "  The 
theoretical  canons  commonly  applied  to  determine  the  inci- 
dence of  taxes,"  said  he,  "  are  often  misleading.  They  fur- 
nish us  simply  with  inferences  from  ideal  *  average,'  or 
*  natural/  rates  of  wages  and  profit,  respecting  the  '  tenden- 
cies '  of  taxes  '  in  the  long  run '  and  in  the  absence  of  disturb- 
ing causes."  But  taxes  are  paid  immediately,  under  the  real 
conditions  of  life,  and  out  of  the  actual  wages,  or  profits,  or 
other  funds  of  individuals,  not  out  of  hypotheses  or  abstrac- 
tions in  the  minds  of  economists." 3  Cliffe-Leslie  called 

1  A  Treatise  on  the  Principles  and  Practical  Influence  of  Taxation  and  the 
Funding  System.     By  J.  R.  McCulloch.     London,  1845;   3d  ed-»  J^3,  p.  72. 

2  Manual  of  Political  Economy.     By  the  Rt.  Hon.  Henry  Fawcett.     London, 
1863;  6th  ed.,  1883,  esp.  pp.  551  and  613. 

3  "  The  Incidence  of  Imperial  and  Local  Taxation  on  the  Working  Classes." 
By  Thomas  Edward  Cliffe-Leslie.     In  his  Essays  in  Political  and  Moral  Philoso- 
phy, London,  1879;  2d  ed.  under  the  title  Essays  in  Political  Economy,  London, 
1888,  pp.  388,  389. 


160          Shifting  and  Incidence  of  Taxation 

attention  to  the  effects  of  economic  friction  in  neutralizing 
the  working  of  supposed  immutable  laws,  and  in  producing 
practical  effects  sometimes  the  very  reverse  of  those  assumed. 
He  confined  his  arguments,  however,  to  a  few  taxes ;  and  his 
own  constructive  work  is  not  very  elaborate.  His  special 
doctrines  will  be  noticed  below. 

The  most  recent  treatment  of  the  subject  is  to  be  found  in 
the  two  general  treatises  on  the  science  of  finance  by  Professor 
Bastable  and  Professor  Graziani,  both  of  them  published  since 
the  first  edition  of  this  work.  Professor  Bastable  takes  a  more 
realistic  view  of  the  problem  than  many  of  his  English  pred- 
ecessors. He  not  only  devotes  a  chapter  to  the  general 
discussion,1  but  appends  some  interesting,  though  brief,  ob- 
servations on  the  incidence  of  particular  taxes.  Much  the 
same  may  be  said  of  the  treatment  of  the  subject  by  Profes- 
sor Graziani.2  The  views  of  both  writers,  which  will  be 
considered  hereafter,  are  largely  in  harmony  with  those  con- 
tained in  the  second  part  of  this  investigation. 

1  Public  Finance.     By  C.  F.  Bastable.     London,  1892;  2d  ed.,  1895,  book  iii, 
chap,  v :    "  The  Shifting  and  Incidence  of  Taxation." 

2  Istituzioni  di  Scienza  delle  Finanze.     Da  Augusto  Graziani.     Torino,  1897, 
libro  v,  capit.  iv :  "  La  Repercussione  delle  Imposte." 


CHAPTER  VI 
THE  NEGATIVE  OR  AGNOSTIC  THEORY 

THE  doctrine  that  it  is  impossible  to  form  any  general 
conclusions  about  the  subject  of  shifting  scarcely  seems  to 
merit  a  place  in  the  list  of  theories  of  incidence.  Yet,  as  this 
is  an  opinion  not  infrequently  met  with  among  practical  men, 
it  will  be  well  to  give  it  passing  attention. 

The  ablest  expounder  of  this  theory  is  Adolf  Held.  His 
discussion  of  incidence  is  based  on  a  denial  of  cost  of  produc- 
tion as  a  condition  of  normal  profits.1  Held  follows  Schaffle 
in  generalizing  the  rent  conception,  and  is,  to  this  extent,  a 
forerunner  of  the  recent  English  and  American  writers  who 
adopt  the  same  idea.  This  conception,  applied  to  profits, 
results  in  the  theory  of  greatest  or  marginal  cost,  and  in  the 
explanation  of  profits  as  the  difference  between  marginal  cost 
and  market  price.  Held,  however,  does  not  draw  the  correct 
conclusions  from  his  theory.  He  was  an  acute  thinker,  and 
a  man  of  the  noblest  ideals ;  but  he  became  so  imbued  with 
the  idea  that  all  of  the  old  political  economy  was  worthless 
that  his  strictures  are  as  often  false  as  true.  Like  so  many 
of  the  younger  Germans,  he  was  stronger  in  criticism  than 
in  construction;  and  his  own  positive  contributions  to  pure 
theory  are  not  very  profound.  His  whole  treatment  rests  on 
a  misunderstanding,  which  sometimes  almost  seems  to  be  a 
wilful  perversion,  of  the  doctrine  of  cost  of  production.  It 
would  not  repay  us  to  discuss  all  his  points  in  detail,  as  even 
the  Germans  themselves,  who  were  at  one  time  deeply  im- 
pressed with  his  views,  have  now  repudiated  his  extreme 

1  "  Zur  Lehre  von  der  Ueberwalzung  der  Steuern."     Von  Adolf  Held.  —  In 
Tilbinger  Zeitschrift  fiir  die  gesammte  Staatswissenschaft,  1 868,  pp.  422-495. 
M  101 


1 62          Shifting  and  Incidence  of  Taxation 

doctrines.  His  conclusions  are  chiefly  negative,  and  may  be 
summed  up  in  the  confession  that  we  can  know  nothing 
about  the  whole  subject  of  incidence.1  From  Held,  there- 
fore, we  learn  nothing  positive.  His  conclusions,  moreover, 
have  been  accepted  only  by  writers  of  such  little  standing 
that  any  further  consideration  of  the  agnostic  theory  is 
unnecessary. 

1  Cf.,  as  a  sample,  the  following  conclusion :  "  Ueber  die  Abwalzung  der  Kapi- 
talzinssteuer  lasst  sich  also  gar  nichts  sagen,  sie  lasst  sich  nicht  einmal  allgemein 
leugnen." —  Tubinger  Zeitschrift  fur  die  gesammte  Staatsiuissenschaft,  p.  481. 


CHAPTER  VII 

THE  SOCIALISTIC  THEORY 

WHAT  is  here  termed  the  socialistic  theory  of  incidence 
really  ought  not  to  be  put  on  a  level  with  the  general  theories 
discussed  in  the  earlier  chapters ;  for  it  is  a  doctrine  that  is 
confessedly  partial  in  character.  But  its  application  is  so 
general,  and  its  propagation  among  large  classes  influenced 
by  the  socialistic  leaders  is  so  earnest,  that  it  deserves  a  few 
words. 

The  theory  was  developed  primarily  by  the  great  agitator 
Lassalle.  Lassalle  devotes  himself  especially  to  the  consid- 
eration of  the  laborer's  interests.  He  terms  indirect  taxes 
all  those  which  are  not  assessed  directly  on  individual  income 
or  property,  including,  therefore,  under  this  head  not  only 
taxes  on  consumption,  but  also  land  and  business  taxes.  All 
these  indirect  taxes  —  in  Germany,  for  instance  —  fall  ulti- 
mately, says  Lassalle,  on  the  poorer  classes  of  society ;  for, 
since  the  laborer  has  not  sunk  quite  so  low  as  the  Irish  work- 
man or  the  Indian  ryot,  a  little  more  can  be  taken  from  his 
wages  before  reducing  him  to  starvation.  Adam  Smith  and 
Ricardo,  who  were  correct  enough  in  their  theory  of  the  inci- 
dence of  taxes  on  produce,  he  continues,  are  here  mistaken ; 
since  it  is  a  scientific  fact  that  wages,  as  compared  with  other 
commodities,  are  always  the  last  to  rise  in  price.  It  is  there- 
fore the  laborer  who  bears  all  the  so-called  indirect  taxes  — 
that  is,  the  greater  part  of  all  taxes.1 

This  exaggerated  doctrine  has  been  accepted  not  only  by 
most  of  the  socialistic  theorists,  but  also  by  popular  writers 

1  Die  indirekte  Steuer  und  die  Lage  der  arbeitenden  Klassen.  By  Ferdinand 
Lassalle.  Zurich,  1863,  pp.  9,  36,  41,  etc. 

163 


164          Shifting  and  Incidence  of  Taxation 

who  are  very  far  removed  from  socialism.  Mr.  Thomas  G. 
Shearman,  for  instance,  while  indeed  limiting  the  definition 
of  indirect  taxes  more  narrowly  than  Lassalle,  is  equally 
extravagant  in  his  statement  of  their  incidence  and  effects.1 
The  more  modern  and  more  scientific  view,  on  the  other 
hand,  is  that  there  is  nothing  inherently  bad  about  an  indi- 
rect tax,  just  as  there  is  nothing  inherently  good  about  a 
direct  tax.  It  depends  entirely  upon  what  kind  of  a  direct 
or  indirect  tax  it  is.  There  are  some  good  indirect  taxes 
which  do  not  fall  on  the  laborer  at  all ;  just  as  there  are  some 
bad  direct  taxes  which,  as  we  shall  see  later,  do  fall  on  the 
laborer. 

1  Natural  Taxation.  An  Inquiry  into  the  Practicability,  Justice  and  Effects 
of  a  Scientific  and  Natural  Method  of  Taxation.  By  Thomas  G.  Shearman. 
New  York,  1895.  See  esP-  chaP-  "i  "  Crooked  Taxation." 


CHAPTER  VIII 
THE  QUANTITATIVE  OR  MATHEMATICAL  THEORY 

THE  authors  who  have  in  some  respects  done  the  best  work 
in  the  study  of  the  incidence  of  taxation  are  precisely  those 
who  have  until  recently  been  largely  neglected.1  They  may 
be  called,  for  lack  of  a  better  name,  the  quantitative  or 
mathematical  school.  They  are  united  not  so  much  by 
similarity  of  conclusions  as  by  identity  of  method. 

Of  these  the  earliest  and  most  suggestive  is  Cournot.  He 
started  out  from  the  assumption  that  the  whole  theory  of 
incidence  is  an  integral  and  necessary  part  of  the  general 
theory  of  value.  In  his  first  and  most  profound  work,2  in 
which  he  laid  down  many  of  the  general  principles  which 
to-day  form  essential  parts  of  the  newer  doctrines  in  pure 
economics,  he  attempted  to  apply  his  theory  of  value  to  the 
study  of  taxation.  Cournot  studied  commodities  under  the 
regime  of  monopoly  and  of  competition  respectively,  and 
employed  the  methods  of  differential  calculus  to  ascertain 
what  influence  an  increase  in  the  supply  price  of  any  com- 
modity would  have  on  the  producer  as  well  as  on  the  con- 
sumer. He  analyzed  the  laws  of  constant,  increasing  and 
diminishing  returns  in  their  relations  to  this  influence,  and  he 
came  to  some  important  conclusions  which  will  be  discussed 
in  the  second  part  of  this  work. 

While  it  is  undeniably  a  relief  to  read  the  clear-cut  and 

1  Not  one  of  the  recent  German  or  French  elaborate  works  in  finance  refers  to 
a  single  member  of  this  school.     Kaizl  and  Falck  also  neglect  them  completely. 

2  Recherches  sur  les  Principes  Mathematiques  de  la    Thcorie  des  Richesscs. 
Par  Augustin  Cournot.     Paris,  1838,  chaps,  vi  and  viii.     An  English  translation 
was  published  in  1898  in  Professor  Ashley's  Series  of  Economic  Classics,  under 
the  title  of  Researches  into  the  Mathematical  Principles  of  the  Theory  of  Wealth. 

165 


1 66          Shifting  and  Incidence  of  Taxation 

precise  doctrines  of  Cournot,  as  compared  with  the  vague 
and  misty  generalizations  of  many  writers  of  the  eclectic 
school,  his  treatment  of  incidence  is  not  entirely  adequate. 
His  whole  study  is  practically  a  discussion  of  the  incidence  of 
taxes  on  commodities.  He  fails  to  remember  that  there  are 
other  taxes  besides  those  on  commodities  and  on  profits ;  and 
he  ignores  the  fact  that  to  regard  a  tax  as  raising  the  normal 
supply  price  or  the  cost  of  production  does  not  exhaust  the 
possibilities  of  the  case.  It  is  true,  indeed,  that  in  a  later 
work l  he  attempts  to  discuss  the  incidence  of  taxation  with- 
out the  use  of  mathematics,  and  to  extend  the  discussion  to 
other  taxes.  But  this  attempt  is  not  always  successful.  In 
certain  cases  —  for  example,  the  tax  on  buildings  —  his  views 
are  even  erroneous.  Moreover,  whole  classes  of  taxes,  like 
that  on  wages,  are  omitted ;  and  no  attempt  is  made  to  lay 
down  any  general  conclusions.  So  far  as  the  study  of  the 
taxation  of  commodities  is  concerned,  however,  Cournot's 
book  has  scarcely  been  surpassed. 

Some  of  Cournot's  ideas  were  developed  by  another  French 
mathematician,  Fauveau.  He  added  practically  nothing, 
however,  except  a  series  of  elaborate  mathematical  formulae, 
and  is  to  be  noticed  mainly  because  of  his  energetic  opposi- 
tion to  the  optimistic  theory.  "The  diffusion  of  taxes,"  says 
he,  "cannot  render  taxes  proportional  any  more  than  the 
diffusion  of  light  makes  a  room  equally  illuminated  in  every 
part,  whatever  be  the  position  of  the  candle."  2  Fauveau 
concludes  rather  sadly  that  it  is  quite  as  easy  for  an  originally 
equal  tax  to  become  unequal  in  its  operation  as  for  an  origi- 
nally unequal  tax  to  become  equal. 

Many  years  later  an  attempt  of  a  similar  nature  was  made 
by  an  English  mathematician,  Fleeming  Jenkin.  Jenkin's 
essay  deals  chiefly  with  what  he  calls  taxes  on  commodities. 

1  Principes  de  la  Theorie  des  Richesses.     Paris,  1863,  book  iii,  chap.  viii. 

2  "  La  diffusion  de  1'impot,  nous  parait-il,  ne  peut  pas  le  rendre  en  definitive 
proportionel  pas  plus  que  la  diffusion  de  la  lumiere  ne  fait  qu'une  chambre  est 
eclaircie  egalement  en  tous  ses  points  quel  que  soit  1'endroit  de  cette  chambre  ou 
1'on  a  place  une  bougie."  —  Considerations  Mathematiques  sur  la    Theorie  de 
VImpbt.     Par  G.  Fauveau.     Paris,  1864,  p.  58. 


The  Mathematical  Theory  167 

Although  he  evidently  knew  nothing  of  Cournot,  Jenkin  was 
among  the  first  of  the  Englishmen  to  apply  the  mathemati- 
cal method  to  economic  problems.  His  original  contribution 
consisted  in  the  use  of  diagrams  based  on  a  combination  of 
the  demand  curve  and  the  supply  curve.  He  concluded 
that  "the  ratio  in  which  a  tax  on  commodities  falls  on 
sellers  and  buyers  is  simply  the  ratio  of  the  diminution  of 
price  obtained  by  the  sellers  to  the  increase  of  price  paid  by 
the  buyers."  1  In  his  treatment  of  taxes  on  land  and  on 
houses,  however,  Jenkin  failed  to  make  the  qualifications 
which  alone  can  give  the  results  practically  true  in  every-day 
life.  Moreover,  he  neglected  other  taxes,  and  made  almost 
no  attempt  to  give  any  general  laws  of  incidence.  Jenkin's 
remarks  on  the  special  point  of  the  influence  of  taxes  on 
cost,  however,  are  suggestive,  and  will  be  considered  later. 

About  a  decade  later,  a  young  Italian  economist,  who  has 
since  become  well  and  favorably  known  to  English  readers, 
Professor  Pantaleoni,  devoted  a  whole  volume  to  the  study  of 
the  incidence  of  taxation.2  He,  also,  was  ignorant  of  the 
work  of  Cournot,  but  attempted  to  base  his  theory  on  the 
doctrine  of  cost  of  production  worked  out  on  arithmetical 
lines.  Pantaleoni  devoted  over  half  of  his  work  to  what  is 
really  a  part  of  pure  economic  theory  —  the  doctrine  of  value 
—  and  then  proceeded  to  discuss  the  incidence  of  some  of 
the  chief  separate  taxes.  His  study  is  the  most  comprehen- 
sive one  yet  published  on  the  general  subject,  although  — 
strange  to  say  —  it  has,  until  very  recently,  received  no  con- 
sideration outside  of  Italy  itself.  While  there  is  a  great  deal 
of  acute  and  original  thought  in  the  monograph,  the  work 
suffers  from  the  fact  that  its  doctrine  of  incidence  is  largely 

1  Fleeming  Jenkin,   "  On  the   Principles  which  Regulate  the  Incidence  of 
Taxes,"  in  Proceedings  of  the  Royal  Society  of  Edinburgh,  Session  1871-1872,  pp. 
618-631.     Cf.  Grant's  Recess  Studies,  1870,  pp.  151-185,  for  his  "Supply  and 
Demand  schedule."     The  essay  on  taxation  was  reprinted  in  Papers,  Literary, 
Scientific,   &c.,  by  the  late  Fleeming  Jenkin.      Edited  by   Sidney  Colvin  and 
J.  A.  Ewing.     London,  1887,  ii,  pp.  107-122. 

2  Teoria  delta  Traslazione  dei   Tributi.     Definizione,  Dinamica  e   Ubiquita 
della  Traslazione.     Da  Maffeo  Pantaleoni.     Rome,  1882. 


1 68          Shifting  and  Incidence  of  Taxation 

based  upon  economic  theories  which  are  open  to  question. 
Thus,  the  value  of  the  author's  treatment  of  the  tax  on 
profits  is  somewhat  impaired  by  the  dubious  doctrine  of 
profits  that  he  espouses.  Again,  his  treatment  of  the  land 
tax  and  of  the  house  tax  is  neither  exact  nor  correct.  It  may, 
in  fact,  be  affirmed  that  some  of  the  doctrines  upheld  in  the 
work  no  longer  represent  the  views  of  the  author.1  We  omit 
in  this  place  a  detailed  statement  of  the  special  doctrines,  as 
we  shall  have  occasion  to  revert  to  them  constantly  in  the 
following  pages.  Notwithstanding  some  imperfections,  Pro- 
fessor Pantaleoni's  work  contains,  on  the  whole,  the  best 
existing  treatment  of  the  incidence  of  taxation,  as  a  matter  of 
pure  theory. 

Comparatively  few  of  the  recent  continental  writers  belong- 
ing to  the  mathematical  school  have  attempted  to  make  any 
application  of  this  method  to  the  theory  of  the  incidence  of 
taxation.  As  regards  the  Austrian  writers,  who  have  devel- 
oped the  psychological,  rather  than  the  mathematical,  method 
in  economics,  and  who  have  applied  the  newer  theories  of 
value  to  various  problems  of  taxation,  neither  Menger,  Wieser, 
Bohm-Bawerk  nor  Sax  has  made  use  of  these  newer  theories 
to  explain  the  doctrines  of  incidence.  On  the  other  hand, 
Auspitz  and  Lieben  in  Austria,  and  Launhardt  in  Germany, 
apply  some  of  their  diagrams  of  the  supply  and  demand 
schedules  to  questions  of  taxation.2  Among  the  modern  con- 
tinental writers  of  the  mathematical  school,  however,  the 
French,  or  rather  Swiss,  economist  Walras  stands  preemi- 
nent. When  he  discusses  the  theory  of  taxes  on  monopolies, 
he  refers  to  the  works  of  Cournot  and  Dupuit.3  But  his  own 

1  In  answer  to  a  letter  from  the  present  writer  stating  that  he  did  not  agree 
with  several  of  the  doctrines  laid  down  in  the  work,  Professor  Pantaleoni  intimated 
that  his  present  views  differ  in  some  respects  from  those  expressed  in  the  book. 

2  Auspitz  und  Lieben,   Untersuchungen  iiber  die   Theorie  des  Preises,  1889; 
W.  Launhardt,  Mathematischc  Begriindung  der  Volkswirthschaftslehre,  1885. 

8  Dupuit  was  one  of  the  first  to  attempt  to  illustrate  the  principles  of  marginal 
utility  and  of  monopoly  price  by  mathematical  methods.  See  his  articles  "  De 
la  mesure  de  1'utilite  des  travaux  publics,"  in  the  Annales  des  Fonts  et  Chausees,  2d 
series,  vol.  viii,  1844;  and  "  De  Pinfluence  des  peages  sur  1'utilite  des  voies  de 
communication,"  Ibid.,  1849. 


The  Mathematical  Theory  169 

treatment  of  the  whole  subject  results  in  conclusions  that 
seem  a  little  too  simple.  According  to  Walras,  a  tax  on  land, 
owing  to  the  theory  of  the  rent  charge,  rests  only  on  the 
original  owners.  A  tax  on  wages  rests  on  the  wage-earner, 
because  the  theory  of  capitalization  is  not  applicable  here. 
A  tax  on  what  he  calls  artificial  capital  or  interest  is  nothing 
but  an  indirect  tax  on  consumption,  because  it  is  inevitably 
shifted.  Taxation  can  really  hit  only  "  natural  wealth,"  that 
is,  either  agricultural  rent  or  wages.1  In  a  more  recent  work, 
Professor  Walras  recurs  to  his  general  theory  of  taxation,  but 
has  only  a  little  to  say  about  incidence,  further  than  to  point 
out  the  impossibility  of  the  equal-diffusion  theory.2 

We  come  now  to  a  group  of  economists  who  have  ad- 
vanced some  new  views  during  the  past  few  years.  One 
of  the  most  original  of  these  recent  efforts  has  been  made  by 
an  acute  Swedish  writer  —  Knut  Wicksell.3  He  complains 
that  the  ordinary  theory  of  incidence  deals  only  with  the  rela- 
tions of  the  producer  to  the  consumer;  and  objects  that,  in 
the  many  cases  where  the  tax  is  supposed  to  rest  upon  the 
producer,  this  theory  does  not  go  far  enough,  since  produc- 
tion is  a  process  involving  the  cooperation  of  several  factors 
—  land,  labor  and  capital.  The  real  difficulty,  therefore,  says 
Dr.  Wicksell,  is  to  trace  the  effect  of  a  tax  on  these  various 
classes  of  society, — the  farmers,  the  capitalists  and  the 
laborers.  In  order  to  solve  this  problem,  he  accepts  the  the- 
ory of  Bohm-Bawerk  as  to  the  importance  of  the  comparative 
period  of  investment.4  This  theory,  as  is  well  known,  states 
that  the  longer  the  comparative  production-period  or  period 
of  investment  of  capital,  the  greater  its  productivity.  Since 
the  application  of  labor  amounts  to  a  lengthening  of  this 

1  Theorie  Critique  de  Vlmpot.    Par  Leon  Walras.    Paris,  1861,  pp.  31-57.    In 
his  Elements  d"1  Economic  Politique  Pure,  M.  Walras  seems  to  have  altered  his 
opinion,  but  still  clings  to  the  rent-charge  theory.     See  the  3d  ed.,  1896,  pp. 
446-460. 

2  Etudes  d' Economic  Sociale.     Par  Leon  Walras.     Paris,  1896,  p.  445. 

8  Finanztheoretische  Untersuchungen  nebst  Darstellung  und  Kritik  des  Stcuer- 
ivesens  Schwedens.     Von  Knut  Wicksell.     Jena,  1896. 
4  Ibid.,  p.  31. 


170          Shifting  and  Incidence  of  Taxation 

period  of  investment,  the  productivity  of  labor  will  increase 
with  the  extent  to  which  it  is  applied  in  long  periods  of  pro- 
duction. Starting  out  from  this  premise,  Dr.  Wicksell  seeks 
to  reconstruct  the  theory  of  incidence,  by  endeavoring  to 
measure  the  effects  of  a  tax  upon  the  elements  that  con- 
tribute to  a  lengthening  or  a  shortening  of  the  production 
period.1  His  conclusions,  however,  although  based  on  much 
keen  and  attractive  analysis,  are  vague.  In  order  to  simplify 
his  processes,  he  posits  all  kinds  of  hypotheses  which  are  not 
true  in  actual  life,  and  seeks  to  bolster  up  his  conclusions  by 
a  detailed  apparatus  of  mathematical  reasoning.  When  he 
comes  to  the  conditions  of  real  life,  the  complications  become 
so  great  that  his  preliminary  hypotheses  turn  out  to  be  of 
little  use,  and  the  conclusions  vanish.2  Nevertheless,  as  an 
intimation  of  the  kind  of  difficulties  that .  beset  those  who 
attempt  to  trace  the  ultimate  effects  rather  than  the  imme- 
diate incidence  of  certain  kinds  of  taxes,  Dr.  Wicksell's  book 
is  worthy  of  study.  Whether  the  application  of  his  new 
principle  will  really  solve  any  present  problems  is  still  to  be 
ascertained. 

Among  the  most  recent  Italian  writers  of  the  mathematical 
school,  reference  may  be  made  to  Professor  Conigliani.  He 
devotes  himself  primarily  to  the  wider  subject  of  the  general 
effects  of  taxation.3  So  far  as  he  speaks  of  shifting  and  inci- 
dence, he  attempts  to  give  only  the  "abstract,  general  the- 
ory," apart  from  its  application  to  any  existing  systems  of 
taxes,  and  apart  from  any  "  exceptional,  transitory  or  irregu- 
lar" phenomena.  The  result  of  such  a  method  of  study, 
based  on  the  recent  Austrian  theories  of  subjective  value,  is 

1  Finanztheorctische  Untersuchungen  nebst  Darstelhmg  und  Kritik  des  Steuer- 
ivescns  Schwedens,  p.  37. 

2  Dr.  Wicksell  himself  states :  "  Dies  mag  nun  so  klingen  als  ob  die  praktische 
Losung  der  Frage  fur  immer  unmoglich  sei."     He  thinks  that  an  escape  from  this 
conclusion  may  be  found  in  the  fact  that  we  really  need  only  an  approximate 
answer.     But  he  nafvely  adds :  "  Allerdings  fehlen  sogar  fur  eine  solche  approxi- 
mative Losung  die  notigen  Data  so  gut  wie  vollstandig."  —  Ibid.,  p.  56. 

8  Teoria  generate  degli  Effetti  Economici  delle  Imposte.  Saggio  di  Economia 
Pur  a.  Del  Dottor  Carlo  A.  Conigliani.  Milan,  1890. 


The  Mathematical  Theory  171 

partly  a  series  of  truisms  —  in  which  we  cannot,  even  with 
the  best  of  will,  discern  much  advance  in  theory  —  and  partly 
a  statement  of  tendencies  couched  in  such  general  terms  as 
to  be  of  little  use  in  the  elucidation  of  practical  problems. 
We  include  Conigliani  under  the  mathematical  school  only 
because  he  himself  professes  to  be  among  its  followers.  As 
an  example  of  his  method,  we  give  his  final  conclusion :  "  A 
tax  of  given  intensity  and  extension  falls  with  the  less  inten- 
sity and  extension  on  individual  economies,  and  produces  a 
less  unequal  effect  on  economic  society,  in  proportion  as 
society  is  more  developed.  The  incidence,  when  it  does  not 
have  a  considerable  extension  or  intensity,  assumes  the  less 
easily  the  character  of  a  change  in  activity,  in  proportion  as 
society  is  more  advanced.  Finally  the  change  in  consump- 
tion will  take  place  with  greater  disturbance  of  the  equilibrium 
in  the  degree  of  the  satisfaction  of  wants,  and  therefore  with 
less  change  in  the  internal  arrangement  of  individual  econ- 
omy, in  proportion  as  the  social  environment  in  which  these 
changes  of  taxation  take  place  is  more  advanced."  *  And 
this,  Conigliani  tells  us,  "  completely  exhausts  the  general 
theoretic  problem  of  the  effects  of  taxation." 

It  is  only  fair  to  Professor  Conigliani  to  state  that  in 
another  more  recent  work2  he  has  shown  his  ability  to 
grapple  with  the  detailed  problems  of  shifting.  In  this 
admirable  book  —  which,  like  so  many  of  the  recent  works 
by  Italian  writers,  fairly  staggers  the  reader  with  its  wealth  of 
material  and  evidences  of  wide  reading  —  Professor  Conigli- 

1  "  Un'  imposta  di  data  intensity  ed  estensione,  £  tanto  meno  intensamente  ed 
estesamente  incisa  su  alcune  economic,  e  lo  e  tanto  meno  disegualmente  sulla 
societa  economica  complessiva  quanto  piu  questa  e  evoluta.     L'  incidenza  poi, 
quando  essa  non  abbia  una  considerevole  estensione  ed  intensita,  assume  tanto 
meno  facilmente  il  carattere  di  un  mutamento  nell'  attivita,  quanto  piu  la  societa 
e  progredita.     Infine  il  mutamento  nel  consumo  si  awera  con  tanto  maggiore 
violazione  dell'  equilibrio  dei  gradi  di  soddisfazione  dei  bisogni,  e  quindi  con  tanto 
minore  alterazione  dell'  ordinamento  interne  dell'  economia  individuale,  quanto 
piu  progredito  e  1'  ambiente  sociale,  in  cui  si  immagini  il  mutamento  di  imposta."  — 
Ibid.,  p.  276. 

2  La  Reforma  delle  Leggi  sui  Tributi  Locali.     Da  C.  A.  Conigliani.     Modena, 
1898,  751  pp. 


172          Shifting  and  Incidence  of  Taxation 

ani  comes  to  close  quarters  with  some  of  the  difficult  ques- 
tions of  incidence.  But  here  he  abandons  the  mathematical 
method,  and  treats  the  problem  very  much  from  the  same 
point  of  view  as  his  compatriot  Graziani.1  The  only  Italian 
writer  to  follow  the  lead  of  Cournot  is  Major  Barone,  who 
substitutes  diagrams  for  algebraic  formulae.  He  has  pub- 
lished a  succinct  but  very  suggestive  essay  2  on  some  funda- 
mental theorems  in  the  pure  theory  of  taxation,  working  out 
in  mathematical  form  some  of  the  points  referred  to  in  the 
following  pages. 

Among  recent  English  writers,  we  turn  naturally  to  the 
two  leaders  of  economic  thought,  Professors  Marshall  and 
Edgeworth.  The  former  has  called  attention  to  the  con- 
nection between  the  doctrine  of  incidence  and  the  general 
law  of  value.  Although  he  has  reserved  the  fuller  study  of 
the  shifting  of  taxation  for  the  second  volume  of  his  great 
work,  his  incidental  treatment  of  the  topic  has  already 
enriched  the  discussion  with  some  profound  remarks  and 
some  interesting  diagrams.3 

Professor  Edgeworth  has  treated  the  general  subject  in  a 
series  of  recent  articles.4  He  discusses  the  abstract  theory 
with  all  the  force  of  reasoning,  the  nicety  of  distinction  and 
the  acuteness  of  criticism  to  which  the  readers  of  his  other 
works  have  become  accustomed.  His  presentation  discloses, 
perhaps  even  better  than  that  of  Cournot,  the  strong  —  and 
also  the  weak  —  points  of  the  mathematical  method.  While 
we  shall  often  have  occasion  to  refer  to  the  substance  of  Pro- 
fessor Edgeworth's  remarks  hereafter,  this  is  a  convenient 
place  to  say  a  word  about  the  mathematical  method  in  general. 

To  the  reader  who  understands  the  higher  mathematics, 

1  See  above,  p.  160. 

2  "  Di  alcuni  Teoremi  Fondamentali  per  la  Teoria  Matematica  dell'  Imposta." 
Da  Enrico  Barone.     In  the   Giornale  degli  Economisti,  seria   seconda,  anno  v 
(1894),  pp.  201-210. 

8  Principles  of  Economics.  By  Alfred  Marshall.  London,  1890.  3d  ed., 
i895,pp.  519,  523,  535. 

*  "  The  Pure  Theory  of  Taxation."  By  F.  Y.  Edgeworth.  In  the  Economic 
Journal,  vii  (1897),  pp.  46-70,  226-238. 


The  Mathematical  Theory  173 

the  hypothetical  principles  of  the  influence  of  tax  on  price 
can  be  illustrated  with  a  degree  of  refined  precision  that  is 
eminently  satisfactory.  But  this  advantage  is  occasionally 
secured  at  a  heavy  cost.  While  the  intricate  algebraic  for- 
mulae may  be  worked  out  with  perfect  exactitude,  the  slightest 
flaw  in  a  single  symbol  may  invalidate  the  whole  conclusion. 
Furthermore,  the  mathematical  study  of  the  pure  theory  often 
assumes  a  simplicity  of  condition  which  does  not  actually 
exist ;  it  purposely  neglects  the  all-important  element  of  fric- 
tion, and  constructs  hypotheses  irrespective  of  their  agree- 
ment with  the  facts  of  actual  life.  If,  as  sometimes  happens, 
these  hypothetical  results  are  applied  to  the  conditions  of  the 
market-place,  the  results  are  likely  to  be  unreal.  Within 
narrow  limits,  the  mathematical  treatment  of  incidence  is 
exceedingly  valuable,  but  except  where  diagrams  are  em- 
ployed, it  is  apt,  perhaps,  to  be  of  greater  value  to  the  writer 
himself  than  to  the  reader.  In  fact,  the  chief  advantage  of 
the  mathematical  method  is  seen  in  the  use  of  diagrams, 
where  an  intricate  point  which  involves  the  simultaneous 
consideration  of  several  causes  can  be  illustrated  with  greater 
brevity  and  clearness  than  in  any  other  way.  But  when  we 
proceed  from  diagrams  to  the  higher  algebra,  the  use  of  the 
mathematical  method  sometimes  leads  to  refined  calculations 
of  more  importance  to  the  mathematician  than  to  the  econo- 
mist, and  of  little  perceptible  use  in  solving  any  practical 
economic  problems.  It  may  even  be  doubted  whether  the 
mathematical  method  has  independently  discovered  any 
important  principle  susceptible  of  practical  application  that 
could  not  have  been  also  expressed  in  every-day  language. 
That  it  has  not  preserved  its  votaries  from  error  is  evident 
from  Cournot's  unhappy  treatment  of  the  mathematics  of 
international  value.  That  it  sometimes  leads  to  results  which 
are  likely  to  divorce  still  more  the  economics  of  the  closet 
from  the  economics  of  the  market-place  may  be  illustrated  by 
a  slip  of  Mr.  Edgeworth  himself.1 

1  See  the  extended  mathematical  proof  (in  the  Economic  Journal,  vii,  pp. 
230-232)  of  the  proposition  that  a  tax  on  first-class  railroad  tickets  will  reduce 


174          Shifting  and  Incidence  of  Taxation 

It  has  usually  happened,  however,  that  most  of  the  mathe- 
matical economists  have  been  at  the  same  time  distinguished 
thinkers,  who  have  been  able,  as  in  the  case  of  Professor 
Edgeworth,  not  so  much  because  of  their  mathematics l  as 
because  of  their  power  of  keen  analysis,  to  illumine  many  a 
dark  corner  of  pure  theory.  It  is  not  surprising,  then,  that 
to  the  mathematical  economists  we  owe  some  of  the  ablest 
contributions  to  the  subject  of  the  incidence  of  taxation. 

Our  long  and  tedious  task  has  come  to  a  close.  The  sub- 
ject of  the  incidence  of  taxation,  as  we  have  seen,  was  one  of 
the  earliest  to  engage  the  attention  of  writers  on  economic 
questions ;  and  because  of  its  difficulty,  as  well  as  of  its 
importance,  it  has  remained  a  favorite  topic  for  modern 
economists.  The  writers  prior  to  Adam  Smith,  with  a  few 
distinguished  exceptions,  considered  only  a  single  phase  of 
the  larger  problem,  and  attempted  to  connect  their  discussion 
with  some  pending  measures  of  actual  legislation.  The  his- 
tory of  their  views  is  of  interest  primarily  as  containing  the 
germs  of  future  doctrines.  Beginning,  however,  with  the 
Physiocrats  and  Adam  Smith,  we  meet  broader  principles 
based  on  fundamental  theories  of  the  new  economic  science. 
The  Physiocrats  spoiled  their  doctrine  of  incidence  by  accept- 
ing certain  peculiar  views  on  the  nature  of  wealth  and  the 

(not  increase)  the  price  of  the  tickets  of  all  classes.  The  mathematics  which  can 
show  that  the  result  of  a  tax  is  to  cheapen  the  untaxed  as  well  as  the  taxed  com- 
modities will  surely  be  a  grateful  boon  to  the  perplexed  and  weary  secretaries 
of  the  treasury  and  ministers  of  finance  throughout  the  world ! 

1  The  average  man  will  agree  with  Jowett,  who  writes  to  a  correspondent :  "  I 
hope  that  you  will  not  .  .  .  write  anything  that  is  not  perfectly  intelligible  and 
which  cannot  be  expressed  in  words  without  symbols.  You  remember  that  I  was 
always  an  enemy  to  the  mathematical  formulae.  (You)  will  reply  that  I  do  not 
understand  them,  which  is  very  true.  But  ...  I  think  that  all  attempts  of  any 
kind  to  express  ideas  by  numbers  and  figures  have  failed  and  will  always  fail 
because  they  are  not  in  part  materia —  things  indefinite  cannot  be  measured  by 
things  definite,  though  they  may  be  sometimes  illustrated  by  them."  —  The  Life 
and  Letters  of  Benjamin  Jowett.  By  Abbott  and  Campbell.  1897,  "»  PP-  3*5'  3l6- 
For  the  other  view,  see  Edgeworth,  Mathematical  Physics,  1881;  and  the  same 
author's  address  "  On  the  Application  of  Mathematics  to  Political  Economy,"  in 
the  Journal  of  the  Royal  Statistical  Society,  Hi,  part  i,  pp.  538-576. 


The  Mathematical  Theory  175 

principles  of  production.  Adam  Smith  and  Ricardo  here,  as 
almost  everywhere  else,  disclosed  the  real  starting-point  of 
the  inquiry,  and  gave  the  true  direction  to  future  investiga- 
tion. Their  doctrines  need,  indeed,  to  be  rounded  out,  and 
in  part  corrected;  but  this  is  true  only  to  the  extent  that 
their  theories  of  economics  in  general  are  in  need  of  the 
revision  that  they  have  received  in  recent  times. 

The  acceptance  of  the  doctrines  of  Adam  Smith  and 
Ricardo  on  the  subject  of  incidence  was  retarded  by  two 
peculiar  theories  which  long  claimed  the  attention  of  stu- 
dents. The  equal-diffusion  theory,  as  we  have  seen,  was 
developed  primarily  by  French  writers,  although  it  soon 
spread  to  other  countries,  and  at  one  time  appeared  to  be 
in  almost  complete  possession  of  the  field.  It  owed  its 
popularity  chiefly  to  its  seeming  simplicity;  and  it  was 
welcomed  by  the  conservatives  as  a  defence  of  the  existing 
social  order.  But  a  few  acute  thinkers,  as  we  now  know, 
recognized  that  the  theory  was  susceptible  of  a  pessimistic, 
as  well  as  of  an  optimistic,  interpretation ;  and  with  the  new 
weapon  of  attack  now  given  to  the  radicals,  the  popularity 
of  the  doctrine  waned.  Its  total  disappearance,  however, 
was  due  to  the  fact  that  the  essential  weakness  of  the 
premises  was  gradually  recognized.  The  other  doctrine 
which,  for  a  time,  engaged  attention  was  the  capitalization 
theory.  This  was,  however,  applied  primarily  to  the  consid- 
eration of  the  land  tax,  and  never  entirely  supplanted  the 
older  classical  theories  in  general. 

The  great  mass  of  writers  with  whose  views  we  have 
become  acquainted  continued  to  discuss  the  subject  in  a 
more  or  less  conventional  manner.  Some  of  them,  as  the 
members  of  the  eclectic  school,  made  certain  valuable  sug- 
gestions; and  we  can  notice  almost  from  decade  to  decade 
an  increase  in  the  breadth  of  view  and  in  the  attention  to 
points  neglected  by  their  predecessors.  But  the  new  theo- 
ries of  distribution  had  not  yet  been  worked  out,  and  the 
results,  therefore,  were  only  partly  satisfactory.  Two  minor 
theories  that  next  presented  themselves  were  the  rather  de- 


176          Shifting  and  Incidence  of  Taxation 

spairing  doctrine  of  those  who  regarded  the  problem  as  too 
intricate  for  any  satisfactory  solution,  and  the  more  self- 
satisfied  theory  of  those  reformers  who  considered  that  they 
had  discovered  the  real  social  bearing  of  the  doctrine  of 
incidence.  A  real  and  lasting  advance,  however,  was  made 
by  the  writers  who  addressed  themselves  primarily  to  the 
quantitative  relations  of  pure  theory  and  who,  in  part  at 
least,  based  their  conclusions  on  mathematical  processes. 
But  here  again  the  very  welcome  and  timely  insistence  on 
the  general  principles  of  pure  theory  was  attended  with  some 
drawbacks.  On  the  one  hand,  many  of  the  writers  seem  to 
have  considered  pure  theory  as  synonymous  with  the  theory 
of  normal  law  under  static  conditions  and  thus  neglected  the 
element  of  friction  or  the  working  out  of  economic  law  under 
dynamic  conditions.  In  the  second  place,  many  authors 
contented  themselves  with  stating  these  normal  laws  of  in- 
cidence in  general,  with  only  a  passing  illustration  here  and 
there.  Little  attempt  was  made  to  take  up  the  most  impor- 
tant existing  taxes  in  turn,  and  to  trace  their  incidence  in 
detail. 

There  still  remains,  then,  a  task  to  be  accomplished.  Not 
that  a  complete  revolution  or  reconstruction  of  the  doctrine 
of  shifting  is  necessary  or  possible.  Much  —  nay,  by  far 
the  greater  part  —  of  the  doctrine  has  come  down  to  us  in 
a  systematic  development  from  the  original  theories  of  the 
founders ;  but  here  and  there  excrescences  are  to  be  lopped 
off,  gaps  are  to  be  filled.  The  newer  theories  of  distribution 
require  in  part  a  recasting  of  the  doctrine  of  shifting ;  while 
a  due  regard  to  its  practical  importance  justifies  a  restate- 
ment of  the  whole  subject,  which,  while  by  no  means  in- 
attentive to  the  purely  theoretic  aspects  of  the  topic,  shall 
endeavor  continually  to  bear  in  mind  their  application  to  the 
problems  of  actual  life. 


PART   II 
THE   DOCTRINE   OF   INCIDENCE 


CHAPTER   I 
GENERAL  PRINCIPLES 

THE  problem  of  the  shifting  of  taxation  is  primarily  a 
question  of  prices.  To  solve  it  is  to  discover  whether,  and 
to  what  extent,  the  imposition  of  a  tax  effects  changes  in  the 
revenues  and  the  expenses  of  individuals ;  in  other  words,  to 
ascertain  which  of  the  two  parties  to  every  economic  trans- 
action —  the  buyer  and  the  seller  —  bears  the  burden  of  the 
tax.  This  is  obviously  not  the  same  as  saying  that  we  are 
dealing  only  with  the  relations  between  the  producer  and 
consumer.  The  vendor  may,  indeed,  be  a  producer ;  but  he 
may  also  be  an  owner  who  has  acquired  the  commodity  with- 
out producing  it.  Whatever  these  relations  may  be,  the 
essence  of  the  inquiry  is :  Are  prices  raised,  and  if  so,  to 
what  extent  are  they  raised?  Whether  we  deal  with  the 
prices  of  consumable  commodities,  of  capital,  or  of  labor, 
this  is  always  the  nature  of  the  problem. 

It  is  readily  perceived,  therefore,  that  the  theory  of  the 
shifting  of  taxation  is  a  part  of  the  wider  theory  of  value,  and 
that  a  comprehension  of  the  facts  of  incidence  depends  on 
an  application  of  these  laws  of  value.  But  the  laws  of  value, 
as  is  now  well  recognized,  deal  primarily  with  the  more  or 
less  subtle  changes  caused  in  the  supply  of,  or  in  the  demand 
for,  commodities.  Even  the  cost  of  production,  which  plays 
so  fundamental  a  part  in  economic  progress,  affects  price 
through  the  medium  of  changes  in  the  relations  of  supply 
and  demand.  Our  concern,  then,  will  be  not  only  to  mention 
those  general  laws  of  value  which  are  of  especial  significance 
to  the  subject  under  discussion,  but  also  to  call  attention  to 
the  varying  conditions  under  which  these  laws  work  them- 

179 


180          Shifting  and  Incidence  of  Taxation 

selves  out.  In  other  words,  we  have  to  deal  not  alone  with 
the  "pure  theory,"  but  also  with  those  phenomena  of  friction 
which  impede  the  action  of  the  general  laws  and  are  of  funda- 
mental importance  in  any  application  of  the  doctrine  to  the 
affairs  of  real  life. 

If  we  take  the  simplest  case  of  a  tax  imposed  on  some 
commodity,  the  ordinary  result  may  be  pictured  somewhat 
as  follows :  — 

The  tax  must  evidently  at  first  be  regarded  as  an  increase 
in  the  cost  of  production.  For  the  time  being,  and  until  the 
old  stock  is  exhausted,  those  who  produced  before  the  new 
tax  was  imposed  are  benefited  to  the  extent  of  the  ultimate 
rise  in  price.  But  as  soon  as  this  interval  has  elapsed,  all 
producers  are  on  the  same  footing.  Since  the  tax  is  an  addi- 
tion to  the  cost  of  producing  the  article,  they  will  seek  to 
recompense  themselves  by  raising  the  price.  Unless  they 
succeed  in  this,  their  profits  will  be  curtailed  and  the  pro- 
duction of  the  article  will  diminish.  For  one  of  two  results 
must  ensue :  either  producers  will  gradually  transfer  their 
capital  to  untaxed  industries,  or,  even  if  the  transfer  of 
capital  is  impossible  because  it  is  firmly  fixed  in  the  indus- 
try, production  will  be  curtailed  by  the  crowding  out  of  those 
who  were  previously  on  the  very  margin  of  profitable  pro- 
duction, while  the  tax  will  prevent  the  influx  of  any  new 
capital.  In  either  case,  then,  in  the 'long  run,  the  supply 
will  decrease ;  and  this  diminution,  provided  the  commodity 
continue  to  be  produced  at  all,  will  involve  an  increase  of 
price.  The  consumer  will,  therefore,  bear  the  burden  of 
the  tax. 

This  seems  to  be  a  very  simple  process.  Not  a  few  have 
even  supposed  that  this  description  exhausts  the  study  of 
incidence.  The  extent,  however,  to  which  this  is  actually 
true,  and  therefore  the  extent  to  which  such  a  tax  will  be 
shifted  to  the  consumer,  depends  on  a  number  of  important 
considerations,  inattention  to  which  will  vitiate  not  only  any 
theoretical  conclusions  as  such,  but  also  their  application  to 
the  facts  of  every-day  life. 


General  Principles  181 

In  the  application  of  the  general  law  of  value  to  taxation 
the  chief  considerations  are  as  follows :  — 

1.  Is  the  commodity  durable  or  perishable  ? 

2.  Is  the  commodity  subject  to  the  law  of  monopoly  or 
that  of  competition  ? 

3.  Is  the  tax  general  or  exclusive  ? 

4.  Is  there  complete  mobility  of  capital  ? 

5.  Is  the  demand  for  the  commodity  elastic  ? 

6.  To  what  extent  do  differential  advantages  of  produc- 
tion affect  the  supply  ? 

7.  Is  the  article  supplied  at  a  constant,  an  increasing  or 
a  diminishing  cost  ? 

8.  Is  the  tax  imposed  on  margin  or  on  surplus  ? 

9.  Is  the  tax  large  or  small  ? 

10.  Is  the  tax  proportional  or  graduated  ? 

11.  Is  the  commodity  a  final  good  or  merely  an  inter- 
mediate good? 

These  considerations  may  now  be  treated  in  order. 

I.   Is  the  Commodity  Durable  or  Perishable? 

On  this  distinction  depend  the  phenomena  of  what  is  called 
the  capitalization  or  the  amortization  of  taxation.  This  prin- 
W  ciple  may  be  expressed  as  follows  :  — 

When  a  special  tax  is  imposed  on  any  one  class  of  com- 
modities to  the  exclusion  of  all  others,  the  tax  will,  under 
certain  conditions,  fall  entirely  on  the  original  owner  of  the 
commodity  —  that  is,  on  the  one  who  owned  it  before  the  tax 
was  imposed  —  and  not  on  the  future  purchaser ;  for  the  tax 
will  be  discounted  through  a  depreciation  of  the  capital  value 
of  the  article  by  a  sum  equal  to  the  capitalized  value  of  the 
tax.  For  instance,  if  the  ordinary  return  on  investments  is 
five  per  cent,  and  if  a  tax  of  one  per  cent  is  imposed  on  all 
railway  bonds,  the  price  of  these  bonds  will  fall  from  par  to 
eighty.  The  new  purchaser  will  really  not  bear  the  weight 
of  the  tax;  for  although  his  net  return  on  each  bond  of  a 
hundred  dollars  will  be  only  four  dollars,  he  will  still  make 


1 82          Shifting  and  Incidence  of  Taxation 

five  per  cent  on  his  investment.  Four  per  cent  of  one  hun- 
dred is  the  same  as  five  per  cent  of  eighty.  In  the  same  way, 
when  unequal  taxes  are  levied  on  different  classes  of  com- 
modities, the  excess  of  the  tax  on  the  overtaxed  commodity 
above  the  general  rate  will  be  capitalized,  so  as  virtually  to 
exempt  future  owners  from  this  differential  burden.  The 
tax,  then,  will  fall  on  the  original  owner,  whose  property  will 
be  diminished  in  value  by  the  capitalized  equivalent  of  the 
excess  of  taxation.  On  the  contrary,  when  a  special  tax  is 
levied  on  such  commodities  at  a  lower  rateythan  that  already 
imposed  on  other  classes,  the  deficiency  in  the  tax  will  be 
capitalized  in  a  sum  which  will  be  added  to  the  value  of  the 
property  in  the  hands  of  the  original  owner.  To  use  our 
preceding  illustration,  let  it  be  assumed  that  all  railway  bonds 
are  taxed  one  per  cent  and  sell  at  eighty.  If  the  tax  on  the 
bonds  of  a  single  railway  company  is  for  some  reason  perma- 
nently reduced  to  one-half  of  one  per  cent,  these  particular 
bonds  will  rise  in  price  to  ninety.  In  this  case  the  original 
owner,  and  not  the  purchaser,  will  benefit  by  the  reduction 
or  the  remission  of  taxation,  just  as  in  the  preceding  case  the 
original  owner,  and  not  the  purchaser,  suffered  from  the  tax. 
Where  the  value  of  the  commodity  diminishes,  the  term 
"  amortization  of  taxation  "  seems  suitable ;  where  the  value 
of  the  commodity  increases,  the  phrase  "  capitalization  of  tax- 
ation "  is  preferable.  Both  phenomena  show  the  results  of 
the  working  out  of  the  same  principle. 

The  question  now  arises :  Under  what  conditions  will  this 
phenomenon  appear?  In  answering  this  question  due  im- 
portance must  be  assigned  to  the  following  five  conditions  :  — 

A.  The  tax  must  be  an  exclusive  or  an  unequal  tax. 

B.  The  tax  must  be  levied   on   a   commodity  which  has 
a  capital  value  and  is  capable  of   having  an  annual  rental 
value. 

C.  The  tax  must  be  levied   on  a  commodity  of   so  pro- 
tracted a  consumption  period  that  several  annual  payments 
are  expected  to  be  made. 

D.  The  tax  must  not  be  susceptible  of  being  shifted  to 


General  Principles  183 

the  consumer  by  the  fact  that  the  commodity  is  used  in  fur- 
ther production. 

E.    The  general   relations   of   demand   and   supply  must 
remain  in  other  respects  the  same. 

j  In  the  first  place,  it  is  clearly  necessary  to  assume  in- 
equality of  taxation.  If  there  is  no  excess,  there  is  nothing 
to  be  capitalized.  The  theory  applies  only  to  taxes  which 
are  exclusive,  or  which  exceed  other  taxes  by  a  definite 
amount.  Inequality  of  taxation  is  the  corner-stone  of  capi- 
talization. 

v  Secondly,  the  commodity  must  have  a  capital  value  which 
is  susceptible  of  diminution.  This  would,  for  instance,  hold 
true  of  land;  in  fact,  we  have  seen  that  the  whole  theory 
arose  from  a  consideration  of  the  land  tax.1  It  is  equally 
true,  however,  of  any  other  commodity  whose  market  value 
is  nothing  but  the  capitalized  rental  value,  the  capitalization 
being  fixed  at  so  many  years'  purchase.  But  the  principle 
cannot  apply  to  taxes  on  income  in  general,  or  to  taxes  on 
wages,  or  to  poll  taxes,  because  in  these,  and  in  all  similar 
cases,  there  is  no  capital  value  that  is  subject  to  amortization 
or  capitalization. 

3  Thirdly,  the  commodity  in  question  must  be  relatively  dura- 
ble in  character.  This  consideration  is  of  such  cardinal  impor- 
tance that  we  have  put  it  at  the  heading  of  this  whole  section. 
When  we  speak  of  a  tax,  we  may  mean  either  a  single  payment 
or  a  more  permanent  annual  payment.  If  the  tax  consists  of 
one  payment  only,  as  in  the  case  of  the  federal  so-called  direct 
tax  during  the  Civil  War,  there  is  no  opportunity  for  capitali- 
zation. Again,  if  the  commodity  is  of  so  ephemeral  a  nature 
that  it  will  be  consumed  before  the  tax  hits  it  a  second  time, 
there  can  obviously  be  no  capitalization.  This  is  the  case 
with  the  so-called  indirect  taxes  on  commodities.  If  a  tax  is 
imposed  on  a  barrel  of  flour,  it  will  ordinarily  be  shifted  to 
the  consumer.  But  if  the  commodity  is  so  durable  that  it 
may  be  subject  to  repeated  taxes,  and  if  the  taxes  are  levied 
at  about  the  same  rate  from  year  to  year,  the  anticipated 

1  See  above,  pp.  137  et  seq. 


184          Shifting  and  Incidence  of  Taxation 

annual  payments  may  be  lumped  together  in  such  a  way  as 
to  cause  a  change  in  the  capital  value  of  the  thing  taxed.  If 
the  special  tax  covers  ten  years  of  the  consumption  period  of 
a  house,  the  imposition  of  the  tax  on  houses  depreciates  the 
value  of  the  house  by  the  present  worth  of  a  ten-year  annuity. 
If  the  commodity  yields  a  perpetual  rental  or  use  —  as  in  the 
case  of  a  piece  of  land  or  of  a  perpetual  bond  —  a  special 
tax  or  an  unequal  tax  on  this  land  or  bond  depreciates  its 
value  by  the  present  rate  of  a  perpetual  annuity.  The  more 
durable  the  commodity,  the  greater  the  chance  of  capitali- 
zation. 

Fourthly,  the  principle  will  not  apply  if  the  tax  is  imposed 
on  a  commodity  which  is  to  be  used  in  further  production, 
where  the  tax  will  simply  raise  the  price  of  the  product, 
instead  of  lessening  the  value  of  the  principal  or  source  of 
the  product.  Thus  an  exclusive  tax  on  iron  used  for  making 
tools  may  result  in  an  increased  price  of  iron  tools  and  may 
be  shifted  onward  to  the  consumer.  If  by  the  shifting  of  a  tax 
we  mean  its  transfer  forward  to  some  one  else,  capitalization 
is  the  opposite  of  shifting.  If  a  tax  is  shifted  onward,  it 
cannot  be  capitalized ;  if  it  is  capitalized,  it  cannot  be  shifted 
onward.  Capitalization  implies  a  depreciation  of  the  capital 
value ;  and  this  is  possible  only  when  the  tax  rests  on  the 
initial  possessor  —  that  is,  when  it  is  not  shifted  onward  to 
any  one  else. 

On  the  other  hand,  if  we  extend  our  conception  of  shifting 
to  include  the  process  of  shifting  backward,  as  well  as  that 
of  shifting  forward,  we  might  call  capitalization  a  kind  of 
shifting.  For,  as  we  have  just  seen,  the  new  purchaser  who 
continues  to  pay  the  tax  from  year  to  year  does  not  bear  it, 
but  in  one  sense  shifts  it  back  upon  the  initial  possessor. 
He  pays  the  tax  indeed;  but  he  has  already  deducted  from 
the  purchase  price  a  sum  equal  to  all  the  future  taxes  which 
he  expects  to  be  called  upon  to  pay.  The  difference  between 
his  case  and  that  of  a  dealer  who  shifts  a  tax  on  commodities 
back  to  the  producer  instead  of  forward  to  the  consumer  is 
that,  in  the  latter  case,  the  tax  is  levied  only  once  on  a  com- 


General  Principles  185 

modity  destined  to  immediate  consumption,  while  in  the  for- 
mer case  a  whole  series  of  payments  is  levied  on  a  durable 
commodity.  In  the  one  case  we  have  the  shifting  back  of  a 
single  tax ;  in  the  other  case  we  have  the  shifting  back 
of  a  whole  series  of  taxes.  For  capitalization  implies  a 
change  in  price  equal  to  the  capital  value  of  all  anticipated 
payments. 

Finally  attention  must  be  called  to  the  fact  that  the  prin- 
ciple sometimes  seems  to  the  careless  observer  to  be  robbed 
of  practical  importance,  as  in  the  case  of  special  taxes  on 
property  or  on  profits,  where  the  capital  value  of  this  class 
of  commodities  for  any  reason  fluctuates  in  price.  For  ex- 
ample, if  a  special  tax  were  levied  on  government  securities 
it  might  nevertheless  happen  that,  for  some  reason,  general 
confidence  in  government  bonds  might  increase  to  such  an 
extent  as  to  counterbalance  the  decreased  returns  from  the 
investment.  In  such  a  case,  although  there  would  obviously 
be  a  capitalization  of  the  tax,  the  process  would  be  obscured, 
and  there  would  be  no  final  diminution  of  capital  value. 
Again,  in  the  case  of  a  special  tax  on  land,  the  value  of  land 
as  an  investment  might  nevertheless  for  some  reason  in- 
crease. This  also  would  impair  the  easy  recognition  of  the 
principle;  the  decrease  in  price  due  to  capitalization  of  the 
tax  would  be  counteracted  by  the  increase  of  price  due  to 
changes  in  demand.  ,  Yet,  although  the  price  has  remained 
the  same,  capitalization  has  obviously  taken  place ;  for  had 
no  tax  been  imposed,  the  price  of  the  bonds  or  of  the  land 
would  have  risen  instead  of  remaining  stationary.  The  pro- 
cess of  capitalization  always  results  in  actual  diminution  of 
capital  value,  if  by  value  we  mean  the  price  as  fixed  by  the 
equation  of  demand  and  supply.  In  the  absence  of  disturb- 
ing causes  which  suddenly  change  this  equation,  the  process 
is  naturally  a  simpler  one.  But  in  every  case,  subject  to  the 
conditions  laid  down  above,  it  remains  true  that  the  increase 
of  an  exclusive  tax  results  in  a  partial  confiscation,  and  that 
its  decrease  is  tantamount  to  a  free  gift. 

With  all  these  qualifications,  the  capitalization  of  taxation 


1 86          Shifting  and  Incidence  of  Taxation 

remains  an  important  topic  in  the  study  of  incidence.      Its 
cause  is  inequality  ;  its  result  is  confiscation  or  gratuity. 


2.   Is  the  Commodity  subject  to  the  Law  of  Monopoly  or  to 
the  Law  of  Competition  ? 

From  the  point  of  view  of  pure  theory,  this  distinction  is 
vital ;  indeed,  the  most  recent  formulation  of  the  law  of  value 
makes  a  sharp  line  of  demarcation  between  the  regime  of 
monopoly  and  that  of  competition.  In  the  domain  of  prac- 
tical life,  also,  the  distinction  is  of  great  importance,  for  the 
number  of  commodities  subject  to  the  regime  of  monopoly 
in  modern  times  is  great  and  growing.  It  is,  indeed,  true  that 
the  cases  of  a  natural  monopoly  are  perhaps  not  more  numer- 
ous in  modern  times.  Not  only,  however,  do  we  find  more 
and  more  legal  monopolies,  through  the  protection  of  indus- 
tries by  patents  and  copyrights,  but  it  is  a  familiar  fact  that 
there  has  been  a  great  increase  in  the  number  and  signifi- 
cance of  the  so-called  economic  monopolies, — those  indus- 
tries where  through  the  working  out  of  economic  law  the 
tendency  is  toward  an  ever  greater  concentration  of  capital, 
gradually  shutting  out  the  existence  of  competition,  until 
finally  we  reach  the  stage  of  complete  monopoly.  The 
familiar  examples  of  this  are,  first,  the  so-called  municipal 
monopolies,  —  gas,  water,  electric  light,  street  railway  busi- 
ness; secondly,  occupations  like  the  railroad  and  express, 
the  telegraph,  the  telephone ;  and  thirdly,  the  host  of  modern 
enterprises  which  are  assuming  the  form  of  trusts. 

The  fundamental  difference  between  the  regime  of  monop- 
oly and  that  of  competition  is,  that  in  the  former  case  price 
is  not  fixed  by  the  cost  of  any  marginal  product.  The  impor- 
tant consideration  here  is  that  a  monopolist  fixes  the  price  at 
the  point  that  will  yield  the  largest  net  return,  and  that  he 
will  limit  the  production  to  such  an  amount  as  will  afford 
him  this  maximum  monopoly  revenue.  He  differs  from  the 
producer  under  competitive  conditions  in  that  he  controls 
the  supply.  From  this  fact  result  such  important  differences 


General  Principles  187 

in  the  law  of  shifting  that  in  almost  every  succeeding  state- 
ment of  principle  it  will  be  necessary  to  distinguish  between 
the  conditions  of  monopoly  and  those  of  competition. 

3.   Is  the  Tax  General  or  Exclusive? 

In  almost  all  the  writings  on  incidence,  the  particular  tax 
under  discussion  is  assumed  to  be  special  or  exclusive.  For 
purposes  of  pure  theory,  this  assumption  is  legitimate,  nay 
even  necessary ;  for  it  is  only  through  isolation  that  we  can 
get  a  clear  picture  of  the  working  of  any  single  force.  But 
it  has  not  infrequently  happened  that  results,  laboriously 
attained  as  hypothetically  true,  have  been  at  once  applied 
to  conditions  under  which  the  hypothesis  is  no  longer  valid. 
We  may,  for  example,  study  the  effects  of  a  particular  tax, 
like  that  on  houses,  and  reach  conclusions  which  are  correct 
on  the  assumption  that  the  tax  is  the  only  one ;  but  in  actual 
life,  the  house  tax  may  be  only  one  of  a  series  of  taxes,  and 
this  fact  may  at  once  invalidate  our  nicely  calculated  results. 
Other  things  being  equal,  the  more  general  a  tax,  the  narrower 
the  taxless  field  to  which  the  persons  concerned  can  migrate ; 
the  less  general  the  tax,  the  greater  the  chance  that  the  tax 
will  be  shifted. 

4.   Is  there  Complete  Mobility  of  Capital? 

The  ordinary  theory  is  that  when  capital  does  not  find  its 
usual  remuneration  in  one  occupation,  it  will  be  transferred 
to  another  industry  where  the  chances  are  better.  In  general, 
this  hypothesis  is  valid,  because  it  is  based  on  the  principle 
of  least  effort.  The  economic  man  may  be  assumed  to 
endeavor  to  secure  the  greatest  returns  with  the  smallest 
outlay.  He  will  transfer  his  capital  from  place  to  place,  or 
from  occupation  to  occupation,  according  to  his  opinion  of 
the  chances  of  profit. 

At  the  same  time,  there  may  be  obstacles  to  immediate 
transfer.  Thus,  where  capital  is  firmly  fixed,  the  owner  may 
lose  more  by  attempting  to  change  it  thanf  he  would  gain  by 


1 88          Shifting  and  Incidence  of  Taxation 

the  transfer.  If  the  capital  is  unremuneratively  invested  in 
a  given  industry,  there  will  be  no  fresh  accessions  of  capital 
to  it ;  and,  as  the  other  industries  prosper,  the  relative  dimi- 
nution of  capital  in  the  first  industry  will,  in  the  long  run,  be 
equivalent  to  a  transfer  of  capital  from  it  to  the  more  pros- 
perous occupation.  But,  in  any  given  business,  at  any  given 
moment,  there  may  be  all  degrees  in  the  rate  of  transfer,  in 
the  degree  of  mobility.  At  the  one  extreme  lies  the  stock 
exchange  business,  where  the  mobility  is  almost  complete; 
at  the  other  extreme  lie  those  forms  of  agriculture  in  which 
capital  devoted  to  improvements  is  almost  entirely  irre- 
movable. 

In  addition  to  this  cause  of  comparative  immobility,  we 
may  mention  minor  reasons,  such  as  the  ignorance  of  the 
capitalist,  the  risk  connected  with  the  transfer,  social  con- 
siderations and  legal  obstacles.1  Whatever  the  reasons,  it  is 
obvious  that  when  a  tax  is  imposed  on  capital  in  any  industry, 
the  smaller  the  degree  of  mobility,  the  less  is  the  prospect  of 
shifting,  and  the  slower  will  be  the  process. 

5.   Is  the  Demand  for  the  Commodity  Elastic? 

.  In  the  general  proposition  laid  down  above,2  no  reference 
was  made  to  the  conditions  of  the  demand :  it  was  assumed 
that  demand  would  remain  constant.  But  this  assumption 
is  obviously  not  the  only  possible  one.  In  order  fully  to 
consider  the  changes  in  price  caused  by  a  tax,  we  must 
therefore  regard  the  situation  more  closely  from  the  point  of 
view  of  the  effective  demand* 

(We  speak  of  the  demand  for  a  commodity  as  elastic,  when 
a  change  in  price  produces  an  alteration  in  demand.  In  such 
a  case  if  the  price  goes  up,  the  demand  falls  off ;  if  the  price 
goes  down,  the  demand  increases.  1  There  are  as  many 
degrees  of  elasticity  in  the  demand  for  various  commodities 
as  there  are  variations  in  human  wants  and  in  the  ability 
of  men  to  satisfy  those  wants.  On  the  other  hand,  if  the 

1  See  below,  p.  267.  2  p.  180. 


General  Principles  189 

demand  for  a  commodity  is  not  variable,  the  inelasticity  may 
assume  two  forms.  The  demand  may  be  inelastic  in  the 
sense  of  being  constant,  so  that  it  always  remains  the  same ; 
or  it  may  be  inelastic  in  the  sense  that  any  attempted  increase 
completely  destroys  the  demand.  We  shall  thus  have  to 
consider  three  possible  cases,  taking  up  first,  under  the  heads 
A  and  B,  the  two  forms  of  inelastic  demand. 

A.  hf  the  tax  is  levied  on  a  commodity  which  the  con- 
sumers must  have  and  which  they  are  willing  to  pay  for  at 
any  expense,  the  demand  will  not  decrease.  j^With  such  an 
invariable  demand  the  price  of  the  commouity  will  rise  by 
just  the  amount  of  the  tax.  J  The  consumer  will  thus  bear  the 
whole  burden.  Practically,  this  is  true  of  only  a  few  com- 
modities. In  a  large  number  of  instances,  however,  prices 
may  rise  considerably  without  greatly  affecting  the  demand. 
Such  would  be  the  case  to  some  extent,  at  least,  with  absolute 
necessaries  as  well  as  with  high-priced  luxuries.  The  demand 
for  the  former  is  not  apt  greatly  to  diminish  unless  people 
starve.  The  effect  of  a  tax  on  such  commodities  would  rather 
cause  a  diminution  in  the  more  elastic  demand  for  comforts, 
or  in  that  for  the  less  absolute  necessaries.  But  the  demand 
for  absolute  necessaries  depends  chiefly  on  the  size  of  the 
population,  not  on  the  price  of  the  article,  (in  the  class  of 
high-priced  luxuries,)  again]  a  tax,  junless  it  be  utterly  exorbi- 
tant, (is  not  likely  to  restrict  consumption  to  any  very  great 
degree.j  Those  who  are  generally  willing  to  buy  such  luxu- 
ries are  not  quite  so  likely  to  be  held  back  by  any  probable 
increase  of  price  as  the  purchasers  with  a  slightly  lower 
standard  of  life.  It  may,  in  fact,  be  laid  down  as  a  general 
rule  that  in  the  case  of  necessaries,  as  well  as  in  that  of 
expensive  luxuries,  great  alterations  of  price  go  hand  in  hand 
with  slight  variations  in  demand ;  while  in  the  case  of  mod- 
erate comforts,  small  changes  of  price  are  accompanied  by 
considerable  variation  in  demand.1  In  the  former  case,  then, 

1  Most  writers,  like  Walras,  £lenlents  d^conomie  Politique  Pure,  2d  ed., 
p.  519,  fail  to  make  this  distinction,  and  contrast  luxuries  in  general  with  necessi- 
ties in  general.  Yet  Cournot  had  already  called  attention  to  the  similarity  be- 


190          Shifting  and  Incidence  of  Taxation 

that  of  absolute  necessaries  and  some  expensive  luxuries, 
under  the  imposition  of  exclusive  taxes  there  will  be  less 
migration  of  capital  from  the  industries  concerned  because 
profits  tend  to  remain  constant.  The  tax  will,  in  the  extreme 
case,  be  shifted  in  its  entirety  to  the  consumer.1 

What  is  only  partly  true,  however,  in  actual  life,  of  abso- 
lute necessaries  and  expensive  luxuries,  applies  in  a  far 
greater  degree  to  what  are  called  complementary  goods.  For 
even  in  the  case  of  luxuries  there  are  generally  some  pur- 
chasers at  the  margin  of  doubt,  who  will  be  dissuaded  from 
buying,  and  who  will  be  tempted  to  substitute  some  other 
commodity  if  the  price  of  the  article  rises.  When,  however, 
as  frequently  happens  in  industrial  enterprises,  we  have  two 
or  more  commodities  which  have  to  be  joined  in  production 
to  accomplish  a  desired  result,  the  one  supplements  the 
other,  and  cannot  be  disused  without  serious  loss.  Familiar 
illustrations  of  such  complementary  goods  are  pen,  ink  and 
paper ;  needle  and  thread ;  cart  and  horse ;  bow  and  arrow.2 
Almost  every  industry  on  a  large  scale  has  its  gradations  of 
such  complementary  goods.  Even  here,  of  course,  there  is 
no  insuperable  bar  to  the  use  of  substitutes.  But  the  price 
of  the  complementary  goods  must  rise  far  higher  than  would 
be  the  case  with  an  ordinary  commodity,  before  the  pur- 
chaser will  be  driven  to  accept  a  substitute.  Where  a  tax  is 
imposed  on  one  of  two  or  more  complementary  goods,  while 

tween  great  luxuries  and  indispensable  necessaries  in  his  Principes  Mathematiques, 
pp.  162,  163,  and  in  his  Principes  de  la  Theorie  des  Richesses,  p.  306. 

1  Pantaleoni,  Traslazione,  pp.  115,  116,  asserts  that  when  the  limit  of  effective 
demand  has  not  been  reached,  the  tax  will  be  divided  between  the  producer  and 
the  consumer.  His  argument  is  that,  since  the  producer's  profits  are  decreased, 
he  will  transfer  his  capital  to  other  industries.  This  great  addition  of  capital  will 
decrease  profits  all  around,  in  the  taxed  as  well  as  in  the  untaxed  industries. 
Thus,  the  producer  will  get  less  profit  than  before. 

This  seems  to  be  a  mistake.  It  is,  on  the  contrary,  difficult  to  see  why  any 
capital  should  be  transferred.  So  long  as  the  limit  of  effective  demand  is  not 
reached,  the  producers  will  not  have  their  profits  curtailed,  because  they  can  in- 
crease the  price  by  the  tax.  Pantaleoni's  argument  thus  appears  to  be  defective. 

*  Cf.  The  Positive  Theory  of  Capital,  by  E.  von  Bohm-Bawerk,  book  iii, 
chap.  ix. 


General  Principles  191 

the  other  is  exempt,  we  come  very  near  to  the  conditions  of 
inelastic  demand.  A  tax  on  one  of  two  complementary  goods 
will  thus  tend  to  be  wholly  shifted  to  the  consumer. 

B.  We  take  up  next  the  other  case  of  an  inelastic  demand, 
that,  namely/where  the  price  of  a  commodity  before  the 
imposition  of  a  tax  has  already  reached  the  limit  of  the  effec- 
tive demand,  and  where  an  attempt  to  increase  the  price  by 
any  portion  of  the  tax  would  totally  annihilate  the  demand.j 
Although ''such  cases*  are  exceedingly  rare  in  practical  life, 
and  represent  a  theoretical  possibility  rather  than  an  actual 
facty  they  deserve  at  least  a  passing  mention.    ;The  commod- 
ity must  be  sold  at  the  accustomed  price,  or  not  at  all;  the 
price  cannot  rise.  )  un  such  a  case  the  tax  cannot  be  shifted  } 
the  whole  weight  of  the  tax  will  fall  on  the  producer.     This 
will,  in  the  long  run,  involve  a  decrease  in  production.    The 
old  producers  will  lose,  and  no  new  capital  will  be  invested. 
Even  if  the  supply  is  diminished,  however,  the  price  cannot 
increase;  for,  by  the  supposition,  consumers  will  prefer  to 
forego  consumption  rather  than  pay  a  higher  price.     The 
net  result  will  be  a  cessation  of  production  with  an  interme- 
diate loss  to  the  owners  of   fixed  capital   in  the   business. 
Under  no  circumstances  can  such  a  tax  be  shifted. 

C.  If,  thirdly,  the  (demand  is  elastic,  as  in  the  case  of 
minor  luxuries  and  of  all  comforts,  —  that  is,  of  the  general 
mass   of    commodities, — in   the   sense   that   the   old   price 
before  the  imposition  of  the  tax  falls  below  what  some  of  the 
consumers  will  in  an  extremity  be  willing  to  pay,  while  the 
new  price,  including  the  tax,  exceeds  what  a  part  of  the  con- 
sumers can  afford  to  pay,  the  tax  will  be  divided  between 
the  consumer  and  the  producers  The  proportions  in  which 
this  division  will  take  place  will  depend,  so  far  as  this  ele- 
ment is  concerned,  chiefly  on  the  elasticity  of  the  demand. 
The  more  persistent  the  demand,  the  greater  is  the  propor- 
tion of  the  tax  which  the  producer  will  be  able  to  add  to  the 
price ;  the  more  sensitive  the  demand,  the  smaller  the  sum 
by  which  he  will  find  it  profitable  to  increase  the  price.     In 
other  words,  the  greater  the  elasticity  of  the  demand,  the 


192          Shifting  and  Incidence  of  Taxation 

more  favorable  —  other  things  being  equal  —  will  be  the  situa- 
tion of  the  consumer. 

All  changes  in  price,  however,  depend  ultimately  on  the 
relations  between  demand  and  supply.  Having  just  dis- 
cussed the  variations  due  to  the  elasticity  of  demand,  what 
shall  we  say  about  those  due  to  the  elasticity  of  the  supply  ? 

At  the  very  outset,  we  may  mention  those  comparatively 
insignificant  cases  in  which  no  increase  of  the  supply  is  pos- 
sible. This  would  be  true  of  old  works  of  art,  of  choice 
wines  of  a  particular  vintage  and  of  similar  articles.  No 
matter  what  the  inducement  may  be,  the  supply  is  inelastic, 
since  it  cannot  respond  to  any  increase  in  the  demand. 
Under  such  circumstances,  the  extent  to  which  the  tax  will 
be  shifted  to  the  consumer  will  depend  on  the  conditions 
mentioned  above  under  A  and  C. 

In  ordinary  cases,  however,  the  supply  possesses  some 
degree  of  elasticity;  but  the  conditions  affecting  elasticity 
of  supply  are  somewhat  more  complicated  than  those  affect- 
ing elasticity  of  demand.  It  may,  however,  be  laid  down  as 
a  (general  rule\that  the /elasticity  of  supply  depends  on  two 
considerations :  first,  the  extent  to  which  differential  advan- 
tages of  production  affect  the  supply  of  the  commodity ;  and 
secondly,  the  ratio  of  product  to  cost,  or  the  law  of  return  to 
which  the  industry  is  subject.)  When  it  is  said  that  the 
elasticity  of  supply  "depends  on"  these  considerations,  no 
attempt  is  made  to  prejudge  the  question  whether  it  varies 
directly  or  inversely  with  these  conditions.  It  is  this  prob- 
lem to  which  we  shall  now  address  ourselves  under  the  sixth 
and  seventh  heads  of  this  chapter. 

6.    To  what  Extent  do  Differential  Advantages  of  Production 
affect  the  Supply  ? 

The  distinction  here  drawn  is  between  those  cases  where 
all  portions  of  the  supply  of  a  given  commodity  are  pro- 
duced at  practically  the  same  cost,  and  those  cases  where  a 


General  Principles 


part  of  the  supply  is  produced  at  a  certain  cost,  and  another 
part  at  a  different  cost.  The  nature  of  this  distinction 
demands  attention  before  we  proceed  to  the  discussion  of 
incidence. 

Ordinarily  producers  differ  either  in  ability  or  in  oppor- 
tunity. While  all  similar  units  in  the  supply  of  a  given 
commodity  sell  at  the  same  price,  the  superior  skill  of  some 
employers,  or  the  more  favorable  situation  of  some  factories, 
or  the  more  fortunate  combination  of  external  causes,  enables 
some  capitalists  to  produce  more  cheaply  than  others.  If, 
now,  we  assume  static  conditions;  if,  in  other  words,  we 
assume  that  both  demand  and  supply  remain  stationary,  that 
there  is  no  change  in  population,  and  no  alteration  in  the 
methods  of  industry,  —  under  such  conditions  it  is  clear  that 
the  normal  value  of  the  articles  will  be  fixed,  not  by  the 
average  cost  of  production,  but  by  the  cost  of  producing 
the  most  expensive  unit.  In  other  words,  Aiormal  value  will 
then  tend  to  equal  the  highest  cost  of  production.}  So  long 
as  the  demand  is  sufficient  to  call  into  existence  commodities 
produced  at  different  costs,  and  so  long  as  there  is  no  altera- 
tion in  relative  supply  and  demand,  the  price  will  be  fixed  by 
the  greatest  cost ;  and  those  who  produce  more  cheaply  will 
benefit  accordingly.  As  the  price  is  fixed  by  the  cost  of 
producing  the  most  expensive  portion  of  the  supply,  the 
difference  between  the  lowest  cost  and  actual  price,  in  any 
given  case,  —  that  is,  (the  difference  between  the  cost  of  pro- 
ducing the  article  under  the  most  disadvantageous  circum- 
stances and  that  of  producing  it  under  the  more  favorable 
conditions, — constitutes  the  producer's  surplus  or  profits.) 

Under  conditions  of  actual  life,  however,  this  assumption 
is  inadmissible.  The  real  conditions  are  dynamic,  not  static. 
There  is  a  continual  movement  going  on,  not  only  from  the 
side  of  demand,  through  changes  in  the  population  as  well 
as  in  the  wants  of  the  purchasers,  but  also  from  the  side 
of  supply,  through  alterations  in  industry.  Under  such 
changing  conditions  of  actual  life,  the  conditions  are  some- 
what more  complex. 


194          Shifting  and  Incidence  of  Taxation 

The  ordinary  course  of  competitive  industry  may  be  por- 
trayed as  follows.  At  any  given  moment,  the  commodity  is 
supplied  by  a  number  of  producers,  and  sells  in  the  market 
at  a  fixed  price.  The  more  efficient  producer,  or  perhaps 
some  newcomer  in  the  field  with  more  capital  or  with  im- 
proved machines  or  with  better  facilities  for  marketing  the 
product,  endeavors  to  capture  a  larger  part  of  the  market  by 
putting  out  an  increased  supply  at  a  somewhat  lower  cost  of 
production.  The  mere  fact  of  this  increase  of  supply  will 
tend  to  depress  the  price ;  and  although  his  percentage  of 
profit  may  be  smaller  than  it  would  have  been  at  the  old 
price,  he  expects  larger  total  profits  because  of  his  ability  to 
sell  more  than  before.  The  increase  of  supply,  at  lower 
price,  must  manifestly  injure  the  less  efficient  producer  at 
the  margin  of  profitable  production.  In  every  business, 
there  are  always  some  producers  who  are  able  just  to  "  make 
both  ends  meet*"  Their  machinery  is  antiquated,  their  capi- 
tal has  been  depleted,  their  business  -activity  and  knowledge 
are  no  longer  what  they  should  be,  and  their  former  profits, 
if  there  ever  were  any,  have  now  vanished.  They  may  con- 
tinue for  a  time  to  struggle  along,  hoping  against  hope,  and 
may  live  on  their  capital,  being  content  to  bridge  over  the 
next  few  years  without  profit;  or,  if  they  have  invested 
heavily  in  unsalable  buildings  and  machinery,  they  may 
deceive  themselves  by  a  fallacious  system  of  book-keeping, 
and  through  a  neglect  to  charge  up  the  items  of  depreciation 
of  stock  or  machinery,  may  figure  out  a  nominal  profit ;  or, 
finally,  if  their  buildings  occupy  a  good  site,  they  may  count 
as  profit  what  is  really  to  be  apportioned  to  rent,  and  their 
gain's  will  accordingly  accrue  to  them  not  as  entrepreneurs, 
but  as  landowners.  But  in  every  case  the  day  of  reckoning 
is  sure  to  come.  Sooner  or  later  the  producer  will  find  that 
he  is  getting  no  return  on  his  industrial  capital.  He  will 
cease  producing  that  particular  commodity;  and  his  place 
will  be  taken  by  some  more  efficient  entrepreneur. 

All  industrial  progress  consists  of  a  continual  change  at 
the  top  and  at  the  bottom  of  the  line  of  producers.  Fresh 


General  Principles  195 

capital  is  continually  coming  in ;  the  discouraged  are  con- 
tinually stepping  out.  Normal  value,  under  dynamic  condi- 
tions, therefore  tends  in  the  direction  of  cost  of  production 
under  the  most  favorable,  not  under  the  least  favorable,  con- 
ditions ;  it  tends  towards  lowest  cost,  not  highest  cost.  The 
market  price  at  any  given  moment  is  indeed,  as  before  —  that 
is,  exactly  as  under  the  hypothesis  of  static  conditions  — 
fixed  at  the  point  of  highest  cost ;  for  at  any  given  moment 
there  is  always  some  unlucky  producer  under  competitive 
conditions  who  furnishes  a  part  of  the  supply  at  cost.  Next 
year  he  will  be  crowded  out,  and  his  place  will  be  taken  by 
some  one  who  can  produce  at  lower  cost.  What  under  static 
conditions  was  a  part  of  the  necessary  supply  becomes  under 
dynamic  conditions  a  part  of  the  actual,  but  temporary,  supply. 

In  practical  life,  therefore,  competitive  profits  are  dynamic 
in  their  nature.  They  exist  only  because  at  any  given  mo- 
ment some  entrepreneurs  can  produce  at  a  lower  cost  than 
those  on  the  margin,  or  no-profit  level;  but  this  margin,  or 
no-profit  level,  is  itself  continually  changing,  and,  under  nor- 
mal conditions  of  progress,  is  continually  receding.  A  large 
class  of  commodities  —  in  fact,  all  competitive  articles  —  are, 
then,  produced  under  such  conditions  that  the  profits  rep- 
resent the  result  of  differential  advantages  of  production. 
These  differences  may  be  summed  up  under  four  heads : 
differences  of  situation  with  reference  to  the  market,  dif- 
ferences in  the  possession  of  improved  machines  or  pro- 
cesses, differences  in  the  personal  abilities  of  the  producers 
and  differences  in  opportunity  or  luck. 

Whenever  all  the  articles  in  a  given  class  are  produced  at 
the  same  cost,  in  fact,  the  resulting  profits  are  monopoly 
profits  and  not  competitive  profits.  Not  only  does  profitable 
production  at  the  same  cost  imply  monopoly,  but  monopoly 
necessarily  means  production  at  identical  cost.  Let  us  con- 
sider the  last  statement  first. 

A  monopoly  may  be  in  the  hands  of  either  a  single  pro- 
ducer or  a  combination  of  producers.  If  there  is  only  a 
single  monopolist,  there  can  obviously  be  only  a  single  cost 


196          Shifting  and  Incidence  of  Taxation 

for  the  supply.  If  there  is  a  combination  of  producers,  the 
same  conclusion  does  not,  at  first  blush,  seem  to  follow.  There 
may  be  a  combination,  as  a  trust  or  pool,  where  the  original 
differences  of  business  ability  or  of  opportunity  among  the 
producers  subsist  after  the  formation  of  the  trust.  The  mere 
fact,  however,  that  the  least  favorably  situated  producer  enters 
the  trust  shows  that  prices  are  no  longer  fixed  at  the  point  of 
marginal  cost,  for  otherwise  he  could  not  secure  any  profits. 
As  a  matter  of  fact,  the  ordinary  agreement  in  a  trust  or  pool 
provides  for  a  lumping  together  of  the  expenses  and  the 
receipts  of  all  members  of  the  combination,  and  for  an  appor- 
tionment of  profits  according  to  a  fixed  percentage.  Thus, 
although  there  is  technically  no  production  of  all  the  units  of 
the  supply  at  identical  cost,  economically  and  so  far  as  con- 
cerns the  relation  of  the  producers  to  each  other  the  various 
parts  of  the  supply  may  be  said  to  be  virtually  produced  at 
the  same  cost 

In  the  second  place,  profitable  production  at  the  same  cost 
implies,  in  the  long  run,  a  monopoly.  It  may  conceivably 
happen  that  in  a  regime  of  competition  all  the  producers  at 
a  particular  moment  are  men  of  precisely  the  same  abilities, 
and  subject  to  the  same  conditions.  In  this  possible  case  — 
which  is  apt  to  be  true  only  of  newly  started  industries  — 
there  would,  indeed,  be  only  one  identical  cost  for  all  units  of 
the  supply.  There  could  then,  however,  not  be  any  perma- 
nent profits  to  all  the  producers,  because  prices  could  not 
permanently  remain  above  the  mere  cost  of  production.  If 
there  were  profits  to  all  the  producers,  competition  would 
induce  one  of  them  to  lower  the  price  in  the  hope  of  securing 
larger  profits  through  greater  sales ;  or,  if  he  did  not  do  so, 
some  new  producer  would  enter  the  field  and  cut  prices. 
The  only  way  in  which  prices  could  be  permanently  kept 
at  the  old  figures  would  be  through  some  control  of  the 
supply.  As  soon  as  this  condition  came  to  pass,  however, 
we  should  no  longer  have  free  competition,  but  should  be  in 
the  presence  of  some  form  of  monopoly.  Thus  not  only  does 
monopoly  imply  production  at  the  same  cost,  but  production 


General  Principles  197 

at  the  same  cost  involves  some  form  of  monopoly.1  Com- 
petitive profits,  on  the  other  hand,  as  we  have  seen,  imply 
varying  costs  of  production. 

In  some  competitive  industries,  however,  the  differential 
advantages  are  far  greater  than  in  others.  Obviously,  when 
these  differential  advantages  are  great,  profits  are  high  for 
the  more  efficient  producer;  when  they  are  small,  there  is 
only  a  slight  margin  of  profit.  The  older  the  industry,  or 
the  simpler  the  conditions  of  production,  the  smaller  is  likely 
to  be  the  margin  of  profit.  Furthermore,  it  must  be  remem- 
bered that  where  there  are  great  differential  advantages  of 
production,  profits  are  high  because  of  the  margin  between 
the  lowest  cost  of  the  most  efficient  producer  and  the  price 
fixed  by  the  supply  of  the  least  efficient  producer.  In  case 
there  are  no  differential  advantages  of  production  —  which, 
as  we  have  seen,  tends  to  be  true  only  of  monopoly  —  profits 
are  high  because  of  the  complete  control  of  supply.  The 
existence  of  profits  depends  here  not  upon  any  competitor, 
but  upon  the  conditions,  of  maximum  monopoly  revenue  — 
that  is,  upon  the  elasticity  of  the  demand  and  the  ratio  of 
product  to  cost. 

Let  us  proceed  now  to  discuss  the  influence  of  these  condi- 
tions upon  the  incidence  of  taxation  in  industries  subject  to 
the  law  of  competition. 

The  fact  that  high  profits  or  moderate  profits  accrue  to  the 
more  favorably  situated  producer  depends,  as  has  just  been 
seen,  upon  the  differences  in  the  cost  of  producing  the  various 
parts  of  the  actual  supply  of  a  commodity.2  If  all  the  incre- 

1  Pantaleoni,  Traslazione  del  Tributi,  who  bases  his  treatment  of  the  taxation 
of  profits  on  what  appears  to  be  an  exaggerated  distinction  between  ordinary 
profits  and  surplus  profits,  fails  to  recognize  the  fact  that  industries  in  which  all 
the  articles  are  produced  at  the  same  cost  are  necessarily  monopolies.     Graziani, 
Instituzioni  di  Scienza  delle  Finanze,  pp.  342-344,  seems  unhesitatingly  to  follow 
Pantaleoni  in  these  points. 

2  Professor  Carver,  in  his  interesting  article  on  "  The  Shifting  of  Taxes  "  which 
was  published  in  The  Yale  Review,  v  (1896),  p.  266,  calls  attention  to  this  point. 
He  puts  the  conclusion  in  somewhat  different  language,  in  saying  that  "  the  elas- 
ticity of  the  production  or  supply  depends  upon  the  extent  to  which  rent  enters 
into  the  production  of  the  article  in  question."     By  rent  he  obviously  means  the 


198          Shifting  and  Incidence  of  Taxation 

ments  of  the  supply  are  produced  at  a  cost  which  varies  but 
little  from  the  market  price,  not  only  will  all  profits  be  small,, 
but  any  appreciable  increase  of  cost  due  to  the  imposition  of 
a  tax  will  tend,  ordinarily,  to  bring  about  a  diminution  in  the 
amount  produced,  because  it  will  trench  on  the  narrow  margin 
between  cost  and  price.  A  tax  will  be  likely,  therefore,  by 
limiting  the  supply,  to  raise  price.  Under  such  conditions, 
the  consumer  will  tend  to  bear  more  of  the  burden. 

On  the  other  hand,  if  the  margin  between  cost  and  price  is 
considerable,  and  if  the  more  favorably  situated  producers 
earn  large  profits,  a  tax  will  bring  about  a  relatively  smaller 
decrease  in  supply,  and  the  augmentation  of  price  to  the 
consumer  will  tend  to  be  less.  In  such  cases,  since  the 
margin  between  the  price  and  the  cost  for  the  most  favorably 
situated  producer  is  so  great,  the  influence  of  the  law  of 
increasing  cost,  referred  to  in  the  next  section,1  will  not  be 
felt  to  such  a  degree  at  first ;  that  is,  there  is  greater  likeli- 
hood that  the  more  capable  producers  will  be  able  to  fill  the 
gap  caused  by  the  cessation  of  production  on  the  part  of  the 
less  efficient  producers.  There  may  even  be  no  decrease  at 
all  in  the  supply,  the  only  difference  being  that  the  level  of 
marginal  cost  is  now,  with  a  part  of  the  tax  added,  a  little 
higher  than  before.  The  effect  of  a  tax  may  then  be  to  ruin 
the  less  efficient  producers,  although  the  more  favored  pro- 
ducers will  no  doubt  also  have  their  profits  somewhat  cur- 
tailed; but  a  smaller  part  of  the  tax  than  before  will  be 
shifted  to  the  consumer. 

It  was  stated  above  2  that  the/elasticity  of  supply  depends 
not  only  upon  the  extent  to  which  differential  advantages  of 
production  enter  into  the  supply,  but  also  on  the  ratio  of 
product  to  cost.j  Having  discussed  the  first  condition,  we 
come  now  to  the  second. 

result  of  differential  advantages  of  production.  Professor  Carver's  statement  is  to 
be  criticised,  however,  because  of  his  inattention  to  the  other  point  which  affects 
elasticity  of  supply  —  namely,  the  ratio  of  product  to  cost  —  which  is  discussed 
below. 

1  Below,  p.  202.  2  See  p.  192. 


General  Principles  199 

7.   Is  the  Article  supplied  at  a  Constant,  an  Increasing  or  a 
Diminishing  Cost? 

;  It  is  well  known  that  in  certain  occupations,  or  under  given 
conditions,  every  successive  application  of  capital  or  labor 
gives  returns  of  approximately  constant  amount.)  The  prod- 
uct is  then  in  exact  ratio  to  the  amount  of  caprtal  or  labor 
applied,  and  the  industry  is  said  to  be  subject  to  the  law  of 
constant  returns.  The  normal  value  of  an  article  which  is 
thus  reproducible  at  a  fixed  cost  tends  to  be  equal  to  the 
cost  of  production. 

/In  certain  occupations,  however,  every  successive  applica- 
tion of  capital  gives  returns,  not  of  the  same,  but  of  a  con- 
tinually smaller  amount.!  ( The  industry  is  then  said  to  be 
subject,  to  the  law  of  diminishing  returns,)  or  of  increasing 
cost.  (This  condition  is  ^normally  true  of  agriculture,  and 
forms  me  basis  of  the  Ricardian  law  of  rent.)  How  far  it 
is  applicable  to  industry  in  general  after  a  certain  stage  of 
profitableness  has  been  passed,  we  shall  see  in  a  moment. 
On  the  other  hand,  the  industry  may  obey,  up  to  a  certain 
point,  the  law  of  increasing  returns  or  of  diminishing  cost. 
For  instance,  where  in  any  industry  the  proportion  of  fixed 
or  constant  expenses  to  total  expenses  is  large,  a  consider- 
able increase  of  production  can  often  be  made  without  a 
corresponding  increase  of  cost.  Successive  applications  of 
capital  and  labor  thus  tend  to  produce  returns  which  are,  to 
a  certain  point,  increasingly  greater  in  amount.  The  prod- 
uct is  not  proportional,  but  progressive. 

Although  this  conception  of  the  laws  of  constant,  increas- 
ing and  diminishing  returns  is  an  old  one,  their  application 
to  the  facts  of  actual  life  is  often  misunderstood.  The  law 
of  constant  returns  is  generally  assumed  to  be  the  normal 
law,  while  the  laws  of  increasing  and  diminishing  returns  are 
supposed  to  be  the  exceptions.  (A  more  careful  consider- 
ation, however,  shows  that  in  ordinary  competitive  enter- 
prises the  law  of  diminishing  returns  is  the  normal  la 
This  has  usually  been  recognized  as  true  of  agriculture ;  but 


2OO          Shifting  and  Incidence  of  Taxation 

it  is  equally  true  of  other  occupations.  In  order  to  show  this 
clearly,  let  us  examine  somewhat  more  closely  what  is  the  real 
import  of  the  laws  of  diminishing  and  of  increasing  returns. 

The  action  of  the  law  of  diminishing  returns  manifests 
itself  in  two  ways.  The  fact  that  after  a  certain  point  has 
been  reached  production  does  not  respond  proportionately  to 
the  energy  applied,  and  that  every  new  "  dose  "  of  capital 
and  labor  gives  less  and  less  returns,  is  familiar  to  all 
engaged  in  ordinary  agricultural  operations.  The  soil  may 
be  prevented  from  deterioration  by  the  skilful  use  of 
manures ;  it  may  even  be  improved  through  the  discovery  of 
newer  methods  of  cultivation ;  but  the  point  must  soon  come 
when  the  increase  of  production  will  be  overtaken  by  the 
increased  application  of  capital  and  labor,  and  when  the 
returns,  as  compared  to  the  expenditure  of  capital  and  labor, 
will  diminish.  The  second  way  in  which  the  law  may  work 
itself  out  is  generally  illustrated  by  a  mine.  Here,  although 
the  returns  may  seem  to  be  constant  from  year  to  year,  the 
capital  itself  which  yields  the  returns  is  being  slowly  con- 
sumed. At  the  end  of  a  given  period,  not  only  will  the 
returns  themselves  abruptly  stop,  but  the  possibility  of  secur- 
ing additional  returns  in  the  future  will  also  have  disappeared. 
We  must,  therefore,  abstract  from  each  recurring  return  a 
sum  which,  when  capitalized  at  the  rate  of  production,  will 
ultimately  amount  to  the  total  original  capital.  Translated 
into  ordinary  business  language,  we  must  allow  for  depre- 
ciation of  stock  or  plant  —  a  depreciation  which,  when  con- 
tinued long  enough,  will  entirely  consume  the  initial  capital. 
In  the  first  case  of  diminishing  returns,  then,  typified  by 
agricultural  land,  the  actual  produce  becomes  yearly  less ;  in 
the  second  case,  illustrated  by  mining  or  badly  conducted 
forestry,  the  nominal  produce  may  remain  the  same,  but  the 
actual  return  on  the  investment  of  capital  becomes  con- 
tinually smaller.  In  both  cases,  therefore,  the  cost  is  a 
proportionately  increasing  one. 

When  we  take  up  the  law  of  diminishing  cost  or  increasing 
returns,  we  likewise  find  that  it  assumes  two  forms  in  ordi- 


General  Principles  201 

nary  industry.  The  one  great  cause  of  increasing  returns  is 
what  may  be  termed  concentration  ;  the  other  may  be  termed 
natural  selection.  How  do  these  operate  ? 

The  economies  of  production,  due  to  the  concentration  of 
smaller  enterprises  into  a  large  concern,  have  been  made 
familiar  in  recent  years.  In  all  enterprises  where  the  invest- 
ment of  capital  is  considerable,  the  proportion  of  constant 
expenses  to  variable  expenses  is  apt  to  be  large.  Some 
expenses  necessarily  grow  with  every  increase  of  business; 
other  expenses  remain  the  same,  whether  the  business  is  large 
or  small.  In  fact,  certain  expenses  will  be  actually  smaller 
with  large  transactions  concentrated  into  one  hand,  than  with 
an  equal  amount  of  transactions  distributed  through  a  variety 
of  producers.  Up  to  a  certain  point,  then,  it  is  possible  that 
an  increase  of  capital  and  labor  will  give  more  than  propor- 
tionate returns.  We  say,  up  to  a  certain  point,  —  because  we 
must  assume  that  here  also  a  time  must  come  when  the  law 
of  diminishing  cost  loses  its  efficacy ;  for  we  should  otherwise 
get  the  absurd  result  of  production  without  any  cost  at  all. 

But  concentration  is  not  the  only  cause  of  increasing 
returns.  There  is,  under  competitive  conditions,  as  we 
pointed  out  above,  a  continual  tendency  for  the  less  efficient 
producer  to  be  crowded  out  by  the  more  efficient.  The 
marginal  producer  —  he  who  is  just  able  to  keep  his  head 
above  water  —  is,  under  ordinary  conditions  of  industrial 
progress,  thrown  back  into  the  ocean  of  failure  and  despair ; 
his  place  is  taken  by  a  more  successful  competitor,  a  new 
marginal  producer  who,  for  a  time,  continues  to  exist  because 
he  can  produce  more  cheaply,  but  who  is  himself  soon  forced 
to  succumb.  This  continual  weeding  out,  to  change  the 
metaphor,  of  the  unfortunate  or  the  incompetent  is  equivalent 
to  the  process  of  natural  selection.  The  community  gains, 
because  it  enjoys  the  services  of  the  more  efficient  producer; 
and  this  greater  efficiency  shows  itself  in  the  increasing  ratio 
of  output  to  every  new  investment  of  capital.  Thus,  where 
industry  is  not  stationary  or  retrograding,  the  natural  selec- 
tion of  entrepreneurs  means  production  at  a  diminishing  cost. 


2O2          Shifting  and  Incidence  of  Taxation 

i 

If  we  attempt  now  to  analyze  the  facts  of  actual  business 
life,  we  shall  find  that  the  forces  which  make  for  diminishing 
returns  and  those  which  make  for  increasing  returns  are 
combined  in  different  proportions  in  various  enterprises. 
Upon  the  extent  to  which  they  are  combined  depends  the 
trend  toward  monopoly  or  toward  competition. 

Suppose,  for  instance,  that  in  any  enterprise  the  economies 
resulting  from  concentration,  and  the  lower  cost  due  to  natu- 
ral selection  of  the  producers,  are  just  about  counterbalanced 
by  the  difficulties  of  securing  additional  room  for  production, 
or  by  drawbacks  connected  with  the  marketing  of  an  increased 
output.  In  such  a  case,  where  the  forces  making  for  in- 
creasing returns  and  those  making  for  decreasing  returns  are 
evenly  balanced,  the  result  will  be  production  according  to 
the  law  of  constant  returns.  Under  such  conditions,  how- 
ever, there  is  no  obvious  reason  why  the  more  efficient  pro- 
ducer will  not  be  able  to  increase  his  output  and  thus  gradu- 
ally to  crowd  out  his  less  efficient  competitors  until  he  secures 
a  monopoly.  Although  he  produces  at  constant  cost,  and 
his  percentage  of  profit  remains  the  same,  his  total  profits 
will  grow  with  the  increase  of  production.  There  is  no  rigid 
limit  to  the  increase  of  output;  the  more  efficient  the  pro- 
ducer, the  greater  the  ease  with  which  he  will  be  able  to 
command  sufficient  additional  capital  to  expand  his  business. 
The  law  of  constant  cost,  therefore,  presupposes  an  industry 
on  the  high  road  to  monopoly. 

Suppose  again  that,  instead  of  being  subject  to  the  action 
of'  the  law  of  constant  returns,  the  industry  obeys  the  law  of 
increasing  returns  or  diminishing  cost.  Here  it  is  plain  that 
the  trend  will  be  still  more  strongly  toward  monopoly.  Un- 
less the  returns  are  unequally  increasing,  so  that  the  less 
favorably  situated  producer  can  still  hold-  his  own  with  the 
more  fortunate  producer,  and  thus  continue  to  furnish  an 
actual  part  of  the  supply,  the  more  efficient  producer  will 
quickly  —  more  quickly  than  in  the  preceding  case  —  gain 
control  of  the  market.  When  the  conditions  are  such  as 
to  realize  the  economies  of  natural  selection,  the  tendency 


General  Principles  203 

toward  monopoly  is  a  strong  one.  When  the  economies  of 
natural  selection  are  joined  to  those  of  concentration,  the 
tendency  toward  monopoly  is  accelerated.  It  is  precisely 
because  in  modern  times  the  forces  working  toward  diminish- 
ing returns  have,  in  so  many  instances,  been  overtaken  by 
man's  mastery  over  nature  that  we  notice  the  well-defined 
movement  toward  trusts,  pools  and  combinations. 

It  is  plain,  then,  that  the  law  of  constant  returns,  and  still 
more  the  law  of  increasing  returns  or  diminishing  cost,  is 
unfavorable  to  the  persistence  of  competition.  The  normal 
law  of  competitive  industry,  under  static  conditions,  is  the 
law  of  diminishing  returns  or  increasing  cost;  and  even 
under  conditions  of  actual  life  —  that  is,  under  dynamic 
conditions  —  a  competitive  industry  may  be  said  to  obey 
the  law  of  constant  or  of  increasing  returns  only  during  a 
period  of  transition.  Constant  returns  and,  to  a  still  greater 
extent,  increasing  returns  or  diminishing  cost,  tend  toward 
monopoly.  It  is  only  at  a  given  time,  and  in  a  given  industry 
which  is  in  the  process,  slow  or  fast,  of  being  monopolized, 
that  the  laws  of  constant  or  of  diminishing  cost  can  prevail. 
When  once  the  complete  monopoly  has  been  reached,  the 
industry  may  obey  the  law  of  diminishing,  constant  or  in- 
creasing cost  according  to  the  conditions  of  the  particular 
case.  But  the  chances  of  the  continuance  of  the  monopoly 
will  be  more  secure  when  it  obeys  the  law  of  constant  cost 
rather  than  of  increasing  cost  or  diminishing  returns ;  and 
they  will  be  still  more  secure  when  the  monopoly  obeys  the 
law  of  diminishing  cost  or  increasing  returns. 

If  we  now  extend  this  analysis  to  the  subject  of  inci- 
dence of  taxation,  we  shall  see  that  the  action  of  the  laws 
of  diminishing  and  increasing  returns  differs  according  as 
we  deal  with  cases  of  competition  or  of  monopoly.  The 
elasticity  of  the  supply  is  affected  in  opposite  ways  by  the 
ratio  of  product  to  cost,  according  as  the  industry  obeys 
the  law  of  monopoly  price  or  of  competitive  price.  Let 
us  proceed  to  show  this  in  detail,  taking  up  first  the  case  of 
monopoly. 


2O4          Shifting  and  Incidence  of  Taxation 

If  a  monopolized  industry  is  subject  to  the  law  of  constant 
returns  so  that  the  cost  of  production  is  the  same  for  all, 
irrespective  of  the  quantities  produced,  the  first  tendency  of 
the  producer  will  be  to  add  the  entire  tax  to  the  price.  But 
as  this  would,  in  the  normal  condition  of  an  elastic  demand, 
decrease  sales  he  will  increase  the  price  by  something  less 
than  the  full  amount  of  the  tax.  If  the  demand  falls  off 
greatly  with  every  increase  of  price  —  or,  in  other  words,  if 
the  margin  of  effective  demand  is  small  —  the  price,  as  we 
have  seen,  will  be  increased  by  much  less  than  the  amount 
of  the  tax,  and  the  producer  will  suffer  most  of  the  loss. 
Conversely,  if  the  demand  is  not  so  elastic,  —  if  an  increase 
of  price  will  produce  only  a  small  decrease  of  demand,  —  a 
larger  proportion  of  the  tax  will  be  added,  and  the  consumer 
will  suffer  more  than  the  producer.1  But  so  long  as  there  is 
a  given  decrease  of  the  demand,  the  increase  of  price  will 
bear  a  given  proportion  to  the  amount  of  the  tax.  The 
producer  will  find  his  greatest  profits  —  even  if  now  reduced 
below  their  old  level  —  at  a  given  point  of  smaller  sales  at 
a  higher  price. 

If,  however,  an  industry  obeys  the  law  of  increasing  returns 
or  diminishing  cost  —  where  each  increment  in  the  amount 
produced  costs  less  than  the  last  —  the  tendency  of  the  pro- 
ducer, in  the  face  of  an  elastic  demand,  will  be  to  add  less 
of  the  tax  to  the  price  than  in  the  preceding  case  of  constant 
returns.  For,  as  soon  as  he  adds  any  given  part  of  the  tax 
to  the  price,  he  will  normally  decrease  consumption.  But, 
if  he  produces  less,  each  unit  will,  on  the  supposition  that 
he  has  been  producing  under  conditions  of  increasing  returns, 
cost  him,  exclusive  of  the  tax,  more  than  before.  The  less 
he  produces,  the  greater  will  be  his  percentage  of  cost.  The 
attempt  to  add  more  than  a  given  part  of  the  tax  to  the  price 
will  be  doubly  disastrous  to  him ;  for  not  only  will  his  sales 
fall  off,  but  his  percentage  of  cost  will  increase  on  the  actual 
sales  that  he  still  makes.  In  the  preceding  case  of  constant 
cost  the  producer  who  has  advanced  the  tax  will  increase  his 

1  For  a  formal  proof  of  this  see  below,  pp.  276-278.     Cf.  above,  p.  191. 


General  Principles  205 

price  only  to  that  point  where  the  smaller  sales  are  compen- 
sated by  the  higher  price,  so  that  his  net  profits  will  still  be 
at  the  maximum.  But  under  the  regime  of  increasing  returns 
or  diminishing  cost,  the  point  at  which  price  will  find  its  level 
is  a  little  lower  down  on  the  scale;  for  since  every  curtail- 
ment of  the  market  means  to  him  not  only  reduced  sales  but 
a  higher  percentage  of  expenses,  he  will  seek  to  restrict 
the  output  as  little  as  possible,  in  order  that  the  proportion 
of  net  receipts  to  gross  receipts  may  remain  at  its  highest 
point. 

The  producer  will  thus  find  it  profitable  to  bear  more  of  I 
the  tax  himself  than  in  the  preceding  case  of  constant  cost.  I 
The  extent  to  which  he  will  bear  a  greater  portion  of  the  tax 
will  depend,  given  a  certain  intensity  of  demand,  on  the 
degree  to  which  cost  increases  with  restriction  of  output. 
The  more  his  percentage  of  expense  grows,  the  less  will  he 
be  tempted  to  advance  the  price.  If  a  high  tax,  for  instance, 
be  imposed  on  the  passenger  tickets  of 'a  railway,  subject  to 
the  law  of  increasing  returns,  where  the  most  profitable 
business  happens  to  be  the  passenger  traffic  and  where  an 
increase  of  fares  would  mean  a  perceptible  falling  off  in 
travel,  the  resulting  abandonment  of  several  passenger  trains 
a  day  would  mean  a  considerable  increase  of  the  percentage 
of  fixed  to  operating  expenses,  and  therefore  a  great  fall  of 
profits.  The  railway  will  therefore  add  as  little  as  possible 
of  the  tax  to  the  fare.  The  less  important  the  passenger 
traffic,  the  weaker  will,  of  course,  be  the  action  of  the  law  of 
increasing  returns,  and  the  greater  will  be  the  inducement 
for  the  railway  to  add  more  of  the  tax  to  the  fare.  Under 
ordinary  conditions,  therefore,  in  the  case  of  a  tax  on  a 
monopolistic  industry  subject  to  the  law  of  increasing  re- 
turns or  diminishing  cost,  the  tendency  is  that  the  consumer 
will  suffer  less  than  in  the  case  of  an  industry  subject  to  the 
law  of  constant  cost. 

On  the  other  hand,  if  the  monopoly  obeys  the  law  of 
diminishing  returns  or  increasing  cost  —  where  each  addi- 
tional increment  of  production  costs  more  than  the  last  — 


206          Shifting  and  Incidence  of  Taxation 

the  producer  will  be  likely  to  add  more  of  the  tax  to  the  price 
than  in  the  case  of  constant  or  increasing  returns.  For 
although  the  increase  of  price  consequent  upon  the  imposi- 
tion of  any  part  of  the  tax  will  decrease  consumption,  each 
unit  of  this  smaller  output  will,  on  the  hypothesis  that  he  has 
been  producing  under  conditions  of  diminishing  returns,  cost 
the  producer,  exclusive  of  the  tax,  less  than  before.  His  in- 
clination to  pay  less  of  the  tax  himself  will  be  strengthened 
by  the  fact  that,  although  the  sale  of  fewer  articles  at  the 
higher  price  may  cause  a  reduction  in  his  gross  receipts,  the 
percentage  of  profit  on  the  smaller  output  will  be  greater,  and 
will  thus  yield  him  higher  net  receipts.  The  extent,  again,  to 
which  the  producer  will  add  more  of  the  tax  to  the  price  than 
in  the  case  of  constant  cost  depends  on  the  rapidity  with 
which  the  percentage  of  cost  increases  with  every  unit  of 
output. 

So  much  for  the  regime  of  monopoly.  On  the  contrary, 
when  we  deal  with  industries  subject  to  competitive  condi- 
tions, the  relations  are  just  the  reverse.  We  have  seen l  that 
the  normal  law,  in  the  case  of  competition,  is  that  of  dimin- 
ishing returns,  and  that  competitive  industries  obey  the  laws 
of  constant  or  of  increasing  returns  only  in  cases  of  transi- 
tion. But  for  the  sake  of  uniformity  we  may  here  again,  as 
in  the  former  case  of  monopoly,  take  the  law  of  constant 
returns  as  the  starting-point  of  our  analysis. 

The  great  distinction  between  competition  and  monopoly  is 
that  under  conditions  of  competition,  although  the  price  of  a 
commodity  continually  tends  toward  the  point  of  lowest  cost, 
it  is  fixed  at  any  given  moment  at  the  point  of  marginal  or  of 
highest  cost ;  while  under  conditions  of  monopoly  there  is  no 
marginal  cost,  because  there  is  no  marginal  producer.  The 
application  to  the  problem  of  incidence  of  taxation  is  obvious. 
If  the  competitive  industry  obeys  the  law  of  constant  cost, 
the  extent  to  which  a  tax  will  increase  the  price  depends, 
other  things  being  equal,  primarily  on  the  nature  of  the 
demand  curve.  The  more  persistent  the  demand,  the  greater, 

1  Above,  pp.  202-203. 


General  Principles  207 

as  we  have  seen,  is  the  proportion  of  the  tax  which  the  pro- 
ducers will  be  able  to  add  to  the  price.  If  a  competitive 
industry,  however,  obeys  the  law  of  increasing  returns  or 
diminishing  cost,  which  as  we  have  learned  is  true  only  of 
periods  of  transition,  the  tendency  of  the  producer  will  be  to 
add  more  of  the  tax  to  the  price  than  in  the  case  of  constant 
returns.  For  any  increase  of  price  due  to  the  tax  will  tend 
to  decrease  consumption.  If  he  produces  less,  however,  each 
unit  will,  under  the  assumption  that  he  has  been  producing 
under  conditions  of  increasing  returns,  cost  the  producer, 
exclusive  of  the  tax,  more  than  before.  But  if  he  remains 
a  marginal  producer,  the  price  must  finally  find  its  level  at 
this  point  of  higher  cost  to  the  marginal  producer.  In  other 
words,  the  price  will  tend  to  rise  to  a  point  higher  than  in  the 
case  of  constant  returns.  Of  course,  if  he  does  not  continue 
to  compete,  but  is  crowded  out  by  the  abler  producer,  who 
can  more  easily  capture  the  market  under  conditions  of  in- 
creasing returns,  this  result  does  not  necessarily  follow.  It 
may  happen,  for  instance,  that  the  more  favored  producer 
will  take  advantage  of  the  tax  to  drive  the  old  marginal 
producer  out  by  adding  only  a  small  part  of  the  tax  to  the 
price,  hoping  to  recoup  himself  by  an  ultimate  monopoly ; 
and  then,  when  he  secures  a  monopoly,  he  may  put  the  price 
up  again.  But  granting  a  continuance  of  the  competitive 
conditions,  with  the  old  marginal  producer  still  supplying  'his 
share  of  the  output,  the  addition  to  the  price,  as  long  as  the 
competition  lasts,  will  tend  to  be  greater  than  in  the  case  of 
constant  returns.  It  must  continually  be  borne  in  mind  that 
under  the  regime  of  competition  price  always  equals  marginal 
,cost ;  whatever  increases  this  marginal  cost  increases  price. 
The  action  of  the  law  of  increasing  returns  tends  to  aug- 
ment the  marginal  cost  for  the  smaller  output  which  results 
from  the  imposition  of  a  tax;  therefore  it  tends  to  increase 
the  price. } 

J  If  the  competitive  industry,  on  the  other  hand,  obeys,  as  is 
usually  the  case,  the  law  of  diminishing  returns  or  increasing 
cost  —  where  each  increment  in  the  amount  produced  costs 


208          Shifting  and  Incidence  of  Taxation 

more  than  the  last  —  the  producer  will  be  likely  to  add  less 
of  the  tax  to  the  price  than  in  the  case  of  constant  or  dimin- 
ishing cost.J  For  although  the  increase  of  price  consequent 
upon  the  -imposition  of  any  part  of  the  tax  will  decrease 
consumption,  each  unit  of  this  smaller  output  will,  on  the 
hypothesis  that  he  has  been  producing  under  conditions  of 
diminishing  returns,  cost  the  producer  less  than  before.  Since 
price  is  fixed,  under  competitive  conditions,  at  any  given 
moment  at  the  point  of  greatest  cost,  and  since  the  cost  to  the 
marginal  producer  who  remains  a  competitor  is  reduced,  the 
price  will  now  be  a  little  lower  than  in  the  case  of  constant 
returns,  and  still  lower  than  in  the  case  of  increasing  returns. 
In  all  these  cases  —  whether  of  competition  or  of  monopoly, 
whether  of  constant,  of  increasing  or  of  diminishing  cost  — 
the  important  point  remains,  as  before,  the  elasticity  of  the 
demand.  But  given  a  certain  elasticity  of  demand,  we  see 
that  in  the  case  of  monopoly  the  tendency  is  that  less  of  the 
tax  will  be  shifted  to  the  consumer  when  the  industry  obeys 
the  law  of  diminishing  cost  or  increasing  returns,  and  that 
more  will  be  shifted  when  it  obeys  the  law  of  increasing  cost 
or  diminishing  returns;  but  that  in  the  case  of  competition 
the  facts  are  reversed,  and  that  more  of  the  tax  will  be  shifted 
to  the  consumer  when  the  industry  obeys  the  law  of  diminish- 
ing cost  or  increasing  returns,  and  that  less  will  be  shifted 
when  it  obeys  the  law  of  increasing  cost  or  diminishing 
returns.1 

.  *  The  argument'  in  the  text  may  be  illustrated  by  diagrams.  Take  first  the  case 
of  competition.  In  Fig.  I,  let  DD'  be  the  demand  curve.  Let  OX  be  the 
amount  of  product;  let  OF  be  the  line  of  price;  let  OL  be  the  marginal  cost  be- 
fore the  tax,  corresponding  to  the  supply  curve  SJS;  let  ZCbe  the  amount  of  tax 
added  to  the  price  under  the  law  of  constant  returns,  so  that  the  price  after  the  im- 
position of  the  tax  is  OC,  corresponding  to  the  new  position  of  the  supply  curve 
T T'.  If  OM  is  the  amount  produced  at  the  original  price  OL,  giving  gross . 
receipts  of  OLSM,  the  amount  produced  after  the  price  has  been  raised  to  OC 
will  be  OM',  giving  gross  receipts  of  OCT'M'. 

If  the  industry  obeys  the  law  of  diminishing  cost,  as  in  Fig.  2,  the  line  S" S  will 
be  curved  downward.  Before  the  tax  is  imposed,  the  quantity  CM/ will,  as  before, 
be  sold  at  the  price'  OL  or  MS.  But  after  the  tax  is  imposed,  equilibrium  will  be 
attained  when  the  new  supply  curve  TT"  intersects  DD',  which  will  in  this  case 


General  Principles 


209 


This  is,  on  the  whole,  a  comforting  doctrine  to  the  con- 
sumer, because,  as  we  have  seen,  the  condition  most  favorable 
to  a  monopoly  is  that  of  decreasing  cost  or  increasing  returns, 

be  somewhat  to  the  left  of  the  old  point  of  intersection;  so  that  now  the  quantity 
OM"  will  be  sold  at  the  price  M"  T"  or  OE,  which  is  higher  than  OC.    "- 


O      - 


M'  M.     v 

FIG.  i. 
Constant  Returns. 


M"    M  .» 


FIG.  2. 

Increasing  Returns 
or  Diminishing  Cost. 


FIG.  3. 

Diminishing  Returns 
or  Increasing  Cost. 


If  the  industry  obeys  the  law  of  increasing  cost,  as  in  Fig.  3,  the  line  S'"S  will 
be  curved  upward.  Now,  after  the  imposition  of  the  tax,  the  price  will  be  fixed  at 
the  point  T"'t  so  that  the  quantity  OM'"  will  be  sold  at  the  price  M"'  Tf",  or 
OB,  which  is  lower  than  OC. 

The  extent  to  which  in  any  case  the  new  price,  after  the  imposition  of  the 
tax,  exceeds  the  old  price  OL  depends  primarily  upon  the  elasticity  of  the  demand, 
that  is,  the  sharpness  of  the  curve  DD' ;  but  starting  out  from  this  increase  of 
price  under  the  law  of  constant  cost,  diminishing  cost  adds  more  to  the  price, 
increasing  cost  adds  less  to  the  price. 

Under  conditions  of  monopoly,  however,  price  is  fixed  not  at  marginal  cost,  but 
at  the  point  of  maximum  monopoly  returns.  **fhis  depends  upon  the  margin 
between  cost  and  price. 


^<A' 

\T"D 

7' 

N'i 

j 

N 

:>                M'    M. 

FIG.  i. 
Constant  Returns. 

In  Fig.  i,  where  we  have  the  law  of  constant  cost,  let  everything  be  as  before, 
except  that  OS  is  the  cost  per  unit;  the  line  SS'  the  line  of  constant  cost.     Given 
the  demand  curve  DD',  the  monopolist  will  find  the  point  of  maximum  net  re- 
p 


2io          Shifting  and  Incidence  of  Taxation 


and  the  condition  most  favorable  to  competition  is  that  of 
increasing  cost  or  diminishing  returns ;  and  in  each  of  these 
cases  the  tendency  is,  as  we  now  know,  that  less  of  the  tax 

turns  at  a  price  OA,  with  an  output  OM.  His  monopoly  profits  will  be  repre- 
sented by  AA'NS.  If  a  tax  ST  is  now  imposed,  the  monopolist  will  find  it  to  his 
advantage  to  raise  the  price  to  C,  with  an  output  OM',  his  greatest  net  profits  now 
being  CC'  V  T,  a  larger  parallelogram  than  any  other  that  can  be  constructed  on 
the  new  cost  line  TT'. 

In  Fig.  2  we  have  the  law  of  increasing  returns  or  diminishing  cost.  Since 
cost  diminishes  with  output,  the  curve  S"N  is  a  descending  one.  We  assume,  as 
before,  that,  given  the  demand  curve  DD1,  the  monopolist  will  find  his  maximum 
net  returns  at  price  OA,  with  an  output  OM.  This  assumes  that  after  the  point  N 
has  been  reached,  the  cost  will  not  diminish  farther,  for  there  is  always  some  limit 
to  the  law  of  increasing  returns.  At  this  point  the  monopoly  profits  are  repre- 
sented by  AA'NS.  If  the  same  tax  as  before  is  imposed,  the  monopolist  will  now 
find  it  to  his  advantage  to  raise  the  price  only  to  B,  with  an  output  OM".  For 
his  greatest  net  profits  will  now  be  BB'  V"  R,  a  larger  parallelogram  than  any 
other  that  can  be  constructed  on  a  base  intersecting  the  new  (curved)  cost  line 


M"M 


FIG.  2. 
Increasing  Returns  or  Diminishing  Cost. 


O  M'""        M 

FIG.  3. 
Diminishing  Returns  or  Increasing  Cost. 


In  Fig.  3  we  have  the  law  of  diminishing  returns  or  increasing  cost.  Since 
cost  increases  with  output,  the  curve  S'"N  is  an  ascending  one.  We  assume,  as 
before,  that  the  monopolist  will  find  his  maximum  net  returns  at  price  OA,  with  an 
output  OM,  and  with  monopoly  profits  represented  by  AA'NS.  If  the  same  tax 
as  before  is  imposed,  the  monopolist  will  now  find  it  to  his  advantage  to  raise  the 
price  to  E,  with  an  output  OM'".  For  his  greatest  net  profits  will  now  be 
EE'V"  R',  a  larger  parallelogram  than  any  other  that  can  be  constructed  on  the 
base  intersecting  the  new  (curved)  cost  line  T"'  V. 

The  above  reasoning  can  also  be  illustrated  arithmetically.  Let  0$  represent 
a  cost  of  i,  and  ST  a  tax  of  one  hundred  per  cent  or  also  I.  Let  OM  represent 


General  Principles  211 

will  be  shifted  to  the  consumer  than  under  any  other  pro- 
portions in  the  ratio  of  product  to  cost. 

Combining  the  conclusions  reached  under  divisions  6  and 

an  output  of  four  units,  OM'  of  three  and  one-half,  OM"  of  three,  OM"1  of  two 
and  one-half.  Let  the  distance  from  A  to  B,  B  to  C,  and  C  to  E,  be  one-fourth. 
Let  OA  be  a  price  3,  so  that  OB  is  3^,  OC  is  3^,  and  OE  is  3|.  SA  will  then  be 
2,  SB  2\,  SC  2|,  SE  2f.  Under  the  law  of  constant  cost,  before  a  tax  is  imposed, 
monopoly  profits  will  then  be :  — 

At  price  E 2.75  X  2.50  =  6.875 

At  price  C 2.50  X  3       =  7.50 

At  price  B 2.25  X  3.5    =  7.875 

At  price  A 2       X4       =8 

that  is,  the  monopolist  will  prefer  price  A. 

If  a  tax  of  S  T  or  I  is  imposed,  monopoly  profits  will  be  :  — 

At  price  E 1.75  X  2.50  =  4.375 

At  price  C 1.50  X  3       =  4.50 

At  price  B 1.25  X  3.50  =  4.375 

At  price  A I        X4       =4 

that  is,  the  monopolist  will  prefer  the  price  C. 

If  the  industry  obeys  the  law  of  diminishing  cost  or  increasing  returns,  the  sur- 
plus of  price  over  cost  will  no  longer  be  as  before  2,  2^,  2|,  and  2f ,  but,  let  us  say, 
2,  2.20,  2.35,  and  2.40;  that  is,  with  every  unit  of  smaller  output,  the  cost  will  be 
progressively  greater,  and  the  surplus  of  price  over  cost  will  be  progressively  less* 
Thus,  before  the  tax  is  imposed,  monopoly  profits  will  be :  — 

At  price  E       2.40  X  2.50  =  6 

At  price  C 2.35  X  3       =  7.05 

At  price  B 2.20  X  3.50  =  7.70 

At  price  A 2       X4       =8 

that  is,  the  monopolist  will,  as  before,  prefer  price  A. 

After  the  imposition  of  the  tax,  monopoly  profits  will  be :  — 

At  price  E fc 1.40  X  2.50  =  3.50 

At  price  C 1.35  x  3       =  4.05 

At  price  B 1.20  x  3.50  =  4.20 

At  price  A I        X4       =4 

that  is,  the  monopolist  will  now  prefer  price  B,  which  is  lower  than  price  C. 

Finally,  if  the  industry  obeys  the  law  of  increasing  cost  or  diminishing  returns, 
with  every  unit  of  smaller  output  the  cost  will  be  progressively  less,  and  the  surplus 
of  price  over  cost  will  be  progressively  greater;  instead  of  the  surplus  being  as 
before  2,  2^,  2|,  and  2f,  it  will  be,  let  us  say,  2,  2.27,  2.55,  and  2.90.  Then,, 
before  the  tax  is  imposed,  monopoly  profits  will  be :  — 


212          Shifting  and  Incidence  of  Taxation 

7  of  this  chapter,1  it  is  evident  that  elasticity  of  supply  —  by 
which  we  mean  the  responsiveness  of  the  quantity  produced 
to  fluctuations  in  price  —  depends  on  a  combination  of  two 
factors :  the  degree  to  which  differential  advantages  of  pro- 
duction exist,  and  the  ratio  of  product  to  cost.  The  influence 
of  this  ratio  of  product  to  cost  is,  as  we  have  seen,  different 
in  the  case  of  monopoly  from  its  influence  under  conditions 
of  competition.  In  both  cases,  however,  the  greater  the 
chance  that  the  imposition  of  a  tax  will  cause  a  diminution  of 
supply,  the  less  favorable  will  be  the  situation  of  the  con- 
sumer ;  the  smaller  the  prospect  of  a  decrease  in  the  supply, 
the  more  favorable  will  be  his  position. 

We  may  therefore  sum  up  this  part  of  the  discussion  that 
has  been  carried  on  under  divisions  5,  6  and  7,  as  follows : 
The  degree  to  which  a  tax  on  a  particular  commodity  will  be 

At  price  E 2.90  x  2.50  =  7.25 

At  price  C 2.55  x  3       =  7.65 

At  price  B 2.27  x  3.50  =  7.945 

At  price  A 2       X4       =8 

that  is,  the  monopolist  will,  as  before,  prefer  price  A. 

After  the  imposition  of  the  tax,  monopoly  profits  will  be :  — 

At  price  E 1.90  x  2.50  =  4.75 

At  price  C 1.55  X  3       =  4.65 

At  price  B 1.27  X  3.50  =  4.445 

At  price  A I        X4       =4 

that  is,  the  monopolist  will  now  prefer  price  E,  which  is  higher  than  price  C. 

In  the  first  edition  of  this  work  (pp.  151,  152)  the  reasoning  was  applied  only 
to  cases  of  competition.  Professor  Marshall,  likewise,  in  his  interesting  discussion 
{Principles  of  Economics,  book  v,  chap,  xii,  §  4,  p.  524  of  3d  ed.)  deals  only  with 
cases  of  competition.  In  the  following  chapter,  where  he  treats  of  monopolies, 
he  does  not  specifically  discuss  the  action  of  the  law  of  increasing  and  diminish- 
ing cost.  On  the  other  hand,  Professor  Edgeworth  fails  to  make  the  distinction 
between  the  cases  of  monopoly  and  of  competition.  In  the  case  of  competition, 
he  agrees  with  the  view  here  presented  (cf.  Economic  Journal,  vii,  pp.  69,  70) ; 
but  he  thinks  that  the  result  is  the  same  in  the  case  of  monopoly  (ibid.,  pp. 
236,  237,  and  p.  406,  note  4).  Professor  Edgeworth's  demonstration,  like  the 
statement  of  Cournot,  rests  upon  an  assumed  mathematical  proof,  the  accuracy  of 
which  must  be  left  to  those  versed  in  the  higher  mathematics. 

1  See  above,  pp.  192  and  199. 


General  Principles  213 

shifted  to  the  consumer  will  vary  inversely  as  the  elasticity 
/)f  the  demand  and  directly  as  the  elasticity  of  the  supply. 
The  elasticity  of  demand  depends  upon  the  extent  to  which 
the  commodities  in  question  are  removed  not  only  from  the 
category  of  complementary  goods,  but  also  from  that  of 
absolute  necessaries  or  of  high-priced  luxuries,  j  The  elas- 
ticity of  supply  depends  upon  the  extent  to  which  differential 
advantages  affect  the  production,  as  well  as  upon  the  ratio  of 
product  to  cost.  This  ratio  of  product  to  cost,  again,  influ- 
ences the  shifting  of  the  tax  in  opposite  ways  in  cases  of 
monopoly  and  of  competition  respectively.  It  may  be  laid 
down  as  a  general  law  that  when  the  demand  is  more  elastic 
than  the  supply,  the  consumer  will  bear  a  smaller  part  of 
the  tax  than  when  the  supply  is  more  elastic  than  the 
demand.  Whether  a  tax  will  be  shifted  in  its  entirety,  in 
part,  or  not  at  all,  depends  on  the  article  itself,  on  the  degree 
to  which  other  articles  may  be  substituted  for  it,  on  the  size 
of  the  margin  of  profit,  and  on  the  degree  to  which  monopoly 
enters  into  the  nature  of  the  industry  on  the  product  of 
which  the  tax  is  laid.  For  the  working  out  of  this  law  in 
practice,  the  reader  is  referred  to  the  succeeding  chapters 
of  the  present  work.  The  effect  of  a  bounty  will  naturally 
be  the  reverse  of  a  tax. 

These  statements,  so  far  as  we  disregard  the  limiting  or 
opposing  forces  referred  to  in  division  I  to  4  above,1  con- 
tain the  general  law  of  shifting.  We  need  still  to  discuss, 
however,  a  few  considerations,  limiting  the  general  law, 
which  are  often  of  considerable  practical  influence  in  actual 
life. 

8.   Is  the  Tax  imposed  on  Margin  or  on  Surplus? 

When  we  say  that  the  price  of  a  commodity  under  the  law 
of  competition  is  fixed  by  the  cost  of  production,  we  refer  to 
the  cost  of  producing  the  most  expensive  portion  of  the 
actual  supply.  [This  must  not,  however,  be  misunderstood. 
As  was  already  stated,  the  tendency  of  prices  is  to  gravitate 

1  See  pp.  181,  186  and  187. 


214          Shifting  and  Incidence  of  Taxation 

toward  the  cost  of  producing  the  least  expensive,  not  the 
most  expensive,  part  of  the  supply.  Through  the  processes 
both  of  concentration  and  of  natural  selection,  the  least 
efficient  producers  are  continually  being  crowded  out,  and 
the  price  of  the  product  is  continually  being  reduced  —  up  to 
that  point,  at  all  events,  were  there  is  no  possibility  of  further 
economies.  But  while  the  tendency  is  thus  in  the  direction 
of  lowest  cost,  the  temporary  equilibrium  between  demand 
and  supply  at  any  given  moment  adjusts  itself  at  the  point 
of  highest  cost.  In  any  given  season,  when  a  commodity 
is  sold,  there  is  under  competitive  conditions  a  producer  who 
just  gets  back  his  cost,  because  his  cost  is  equal  to  the  price 
at  which  the  whole  supply  is  sold.  In  this  sense  he  is  the 
marginal  producer,  his  product  is  the  marginal  product,  and 
the  price  of  the  whole  supply  is  fixed  at  the  point  of  the  cost 
of  the  marginal  product. 

It  is  clear,  now,  that  if  a  tax  is  imposed  it  will  increase  the 
cost  of  this  marginal  product,  and  provided  that  the  mar- 
ginal producer  continues  to  produce  and  to  remain  the 
marginal  producer,  the  price  of  the  whole  supply  will  be 
raised  by  the  amount  of  the  tax.  To  the  extent  that  the 
marginal  producer  is  crowded  out,  a  smaller  proportion  of 
the  tax  will  be  added  to  price. 

It  may  happen,  however,  that  the  tax  does  not  hit  the 
marginal  product  at  all.  This  may  be  due  to  two  causes. 
In  the  first  place,  the  tax  may  be  imposed  on  product,  but 
it  may  reach  only  other  portions  of  the  supply  than  the 
marginal  portion.  In  the  case  of  interstate  or  international 
competition,  for  example,  one  state  may  tax  that  part  of  the 
supply  produced  within  its  borders,  while  the  price  may  be 
fixed  in  the  international  market,  where  the  most  expensive 
increment  of  the  supply  comes  from  a  country  which  imposes 
no  tax.  The  tax  assessed  in  the  first  state  will  thus  not 
reach  the  marginal  product,  and  will  produce  no  effect  on 
the  price.  Not  until  the  tax  is  so  high  that  the  increased 
cost  of  this  portion  will  relegate  it  to  the  position  of  the  mar- 
ginal product  can  the  tax  influence  the  price. 


General  Principles  215 

Secondly,  a  tax  may  not  reach  the  marginal  product,  be- 
cause it  is  not  imposed  on  production  at  all.  It  may  be 
imposed,  not  on  production,  but  on  the  results  of  production. 
In  order  that  any  change  may  take  place  in  price,  there  must 
be,  as  we  have  seen,  some  alteration  in  the  supply,  A  tax 
on  the  marginal  product  would  obviously  at  once  tend  to 
cause  such  an  alteration  in  the  supply.  But  if  the  tax  is 
imposed  on  what  accrues  to  the  producer  after  all  his  ex- 
penses are  deducted  and  his  accounts  closed,  the  tendency  to 
an  alteration  in  the  supply  will  be  diminished.  The  surplus 
above  all  expenses  is  either  rent  or  profits.  Economic  rent 
and  pure  profits  are  the  results  of  price,  not  conditions  of 
price.  A  tax  on  surplus,  therefore,  would  not  reach  the 
marginal  product  at  all,  and  would  not  tend  to  cause  any 
change  of  price.  It  is  only  through  the  slower  and  more 
indirect  influence  of  a  general  fall  in  profits  that  any  alter- 
ation, if  at  all,  would  take  place.  The  greater  the  extent, 
therefore,  to  which  the  tax  falls  on  surplus,  instead  of  on 
margin,  the  smaller  the  chance  of  any  shifting  of  the  tax. 

9.   Is  the  Tax  Large  or  Small? 

From  the  point  of  view  of  pure  theory  it  might  seem 
immaterial  what  the  rate  of  tax  is;  for  however  slight  the 
charge  might  be,  it  would  still  be  mathematically  measurable. 
But  in  practical  life  individuals  often  observe  the  same  prin- 
ciple that  is  expressed  in  the  legal  maxim  de  minimis  non 
curat  lex.  \K  producer  who  is  called  upon  to  pay  a  very 
small  tax  which  would,  under  ordinary  conditions,  be  shifted 
to  the  consumer,  may  prefer  to  assume  it  himself  rather  than 
to  run  the  risk  of  annoying  his  customer  about  what  is  after 
all  a  trifle.y  Or  the  price  of  the  commodity  may  be  fixed  by 
custom,  so  that  the  producer  will  not  dare  to  risk  loss  by  any 
addition  to  the  price.  A  good  example  of  the  first  case  is 
the  small  tax  imposed  by  the  United  States  in  1898  on  parlor- 
car  tickets.  Rather  than  annoy  the  passengers,  the  compa- 
nies have  assumed  the  tax.  An  equally  good  example  of  the 


216          Shifting  and  Incidence  of  Taxation 

second  case  is  the  small  additional  tax  imposed  by  the  United 
States  at  the  same  time  on  certain  brands  of  cigars  and 
tobacco,  which  continued  to  sell  at  the  same  price  after  the 
imposition  of  the  tax.  As  a  former  five-cent  cigar  or  five- 
cent  package  of  tobacco  could  not  have  been  sold  at  five  and 
a  half  or  six  cents,  the  only  way  in  which  the  producer  could 
escape  the  tax  was  through  a  deterioration  of  the  article. 
How  far  competition  would  permit  him  to  do  this  is  uncer- 
tain. In  all  such  cases  the  unit  on  which  the  tax  is  imposed 
is  of  importance. 

On  the  other  hand,  it  is  equally  true  that  a  very  small  tax 
may,  in  certain  cases,  make  little  difference  to  the  consumer. 
The  elasticity  of  the  demand  may  not  be  appreciably  affected. 
Under  such  conditions  a  producer  who  would  otherwise  be 
tempted  to  bear  the  tax  for  fear  of  losing  the  trade  will  have 
no  scruples  in  adding  the  tax  to  the  price. 

10.   Is  the  Tax  Proportional  or  Graduated? 

The  considerations  hitherto  advanced  as  to  the  normal  con- 
sequences of  the  imposition  of  a  tax  depend  on  the  hypothe- 
sis that  the  tax  is  proportional.  Since  a  graduated  tax  is  the 
rare  exception  rather  than  the  rule  in  practical  life,  those 
conclusions  are  in  general  valid.  But  we  occasionally  find 
—  with  increasing  frequency  in  modern  democracies  —  that 
(the  rate  of  a  given  tax  is  graduated,  instead  of  being  pro- 
portional. In  almost  all  such  cases  the  rate  is  graduated 
upward,  so  that  the  tax  is  progressive ;  in  very  rare  instances 
the  rate  decreases  with  the  amount  assessed,  so  that  the  tax 
is  regressive.1! 

Where  such  a  tax  is  assessed  on  surplus  instead  of  on 
margin,  our  conclusions  respecting  the  shifting  of  a  tax 
require  little,  if  any,  modification.  Whether  inheritances, 
for  instance,  are  taxed  proportionally  or  progressively  can- 
not alter  the  fact  of  the  non-transference  of  the  tax.  But 

1  For  a  fuller  discussion  of  these  terms,  see  Seligman,  Progressive  Taxation  in 
Theory  and  Practice.  New  York,  1894,  pp.  8-12. 


General  Principles  217 

when  a  tax  is  imposed  on  the  marginal  product  —  for  instance, 
on  gross  product  or  on  gross  receipts  —  it  is  obvious  that  a 
progressive  rate  may  completely  alter  the  normal  conditions  of 
profitableness.  Under  ordinary  conditions,  a  proportional  tax 
which  reaches  the  marginal  product  tends  to  increase  the 
price,  as  we  have  seen,  by  increasing  the  cost  of  this  mar- 
ginal product.  But  a  progressive  tax  may  be  so  arranged 
that  it  will  increase  the  expenses  of  the  more  favorably  situ- 
ated producer  far  more  than  those  of  the  one  who  has 
hitherto  been  the  marginal  producer.  It  depends  upon  the 
extent  of  the  progression  whether  the  former  marginal  pro- 
ducer now  becomes  the  favored  producer  or  not.  It  may 
easily  happen  that  a  progressive  tax  on  product  in  general 
will  not  reach  the  margin  at  all.  Where  a  proportional  tax 
would  exert  a  decided  influence  on  cost,  a  progressive  tax 
may  exert,  therefore,  a  far  smaller  influence.  If  a  progres- 
sive tax  be  levied  on  the  buyer  instead  of  on  the  seller,  the 
result  may  be  just  the  reverse.  In  other  words,  the  inci- 
dence of  a  graduated  tax  is  often  less  predictable  than  the 
incidence  of  a  proportional  tax.  In  the  remainder  of  this 
work,  unless  the  contrary  is  definitely  asserted,  (we  \  shall 
always  use  the  word  "tax"  in  the  sense  of  a  proportional  tax.\ 

ii.   Is  the  Commodity  taxed  a  Final  Good  or  merely  an  Inter- 
mediate Good? 

The  entire  discussion  thus  far  has  proceeded  on  the  as- 
sumption that  the  commodity  subject  to  the  tax  is  disposed 
of  by  the  owner,  without  considering  whether  the  owner  is 
the  original  producer  or  not.  Without  the  phenomena  of 
exchange,  however,  the  conditions  which  affect  the  demand 
or  supply  cannot  be  present.  Moreover,  (if  the  commodity 
subject  to  the  tax  has  reached  its  final  owner,  to  be  consumed 
by  him  f— no  matter  how  protracted  the  period  of  consump- 
tion — i  there  is  no  opportunity  for  setting  in  motion  the  forces 
that  affect  price.1  f  Once  the  tax  has  been  shifted  to  the  con- 
sumer, it  will  remain  there.  On  the  other  hand,  if  the  com- 


218          Shifting  and  Incidence  of  Taxation 

modity  is  consumed  productively,  instead  of  unproductively, 
the  user  is  no  longer  the  ultimate  consumer ;  the  commodity 
in  question  is  only  an  intermediate  good,  not  a  final  good; 
and  the  whole  case  is  reopened. 

In  studying  the  consequences,  therefore,  of  any  particular 
tax  in  its  practical  operation,  we  must  bear  in  mind  not  only 
the  normal  theory,  but  the  limiting  conditions.  In  order  the 
better  to  prepare  ourselves  for  the  study  of  their  application, 
let  us  sum  up  these  principles.1 

1.  The  more  durable  the  thing  taxed,  the  larger  will  be 
the  series  of  annual  payments  demanded  by  the  tax,  and  the 
more  disastrous  will  be  the  weight  of  future  payments  when 
shifted  back  upon  the  initial  proprietor  by  future  owners. 

2.  If  the  object  is  monopolized,  the  price  is  not  fixed  by 
any  marginal  product ;  hence  the  tax  will  not  be  shifted  so 
easily  as  in  the  case  of  the  increased  cost  of  a  marginal 
product. 

3.  The  more  general  or  the  less  exclusive  the  tax,  the  nar- 
rower the  taxless  field  to  which  the  producers  concerned  can 
migrate ;  hence  the  greater  the  incentive  to  bear  the  burden 
themselves. 

4.  If   the  capital  is  fixed,  or  if   there  is  any  obstacle  to 
perfect  mobility,  the  shifting  will  be  slighter  and  tardier  than 
otherwise. 

5.  If  the  demand  is  persistent,  the  producers  will  roll  the 
tax  upon  the  consumers  through  a  rise  in  price.     But  if  the 
demand  is  sensitive,  the  producers  will  bear  more  of  the  tax, 
7or  else  some  will  migrate. 

6.  If  different  parts  of  the  supply  of  a  commodity  are  pro- 

1  It  sometimes  happens  that  a  review  of  an  author's  book  puts  the  points  made 
by  him  in  a  new  light.  So  Professor  Ross,  in  his  account  of  the  first  edition  of 
this  work,  brought  together  the  various  principles  laid  down  therein  but  scattered 
through  the  different  chapters.  In  so  doing,  he  has  greatly  clarified  the  whole 
exposition.  See  his  essay,  "  Seligman's  Shifting  and  Incidence  of  Taxation,"  in 
the  Annals  of  the  American  Academy  of  Political  and  Social  Science,  iii  (1893), 
pp.  444-463.  The  statement  in  the  text  differs,  however,  in  some  important 
points  from  that  of  Professor  Ross. 


General  Principles  219 

duced  at  greatl)P*?varying  costs,  the  less  efficient  producers 
will  be  ruined  by  a  tax  which  the  abler  producers  can  readily 
pay. 

7.  If  the  commodity  is  supplied  at  decreasing  cost,  the 
tendency  is  that  where  we  have  competition  the  consumer 
will  be  likely  to  suffer  more  than  in  the  case  of  an  industry 
.subject  to  the  law  of  constant  or  increasing  cost;  but  that 
where  we  have  monopoly,  he  will  be  likely  to  suffer  less. 
Since    the    law   of    decreasing    cost    is    more    favorable    to 
monopoly,  it  follows  that  a  monopolist  is  less  likely  to  shift  a 
tax  than  is  a  producer  under  competitive  conditions. 

8.  To  the  extent  that  a  tax  reaches  the  surplus  rather  than 
the  margin,  shifting  will  be  less  likely  to  result,  since  the 
marginal  product  is  the  price-fixer. 

9.  The  smaller  the  tax,  the  less  will  be  the  disarrangement 
in  the  equilibrium  of  supply  and  demand,  and  the  slighter 
will   be    the   normal    action   that   will    produce   or   prevent 
shifting. 

10.  If  the  tax  is  graduated  instead  of  proportional,  the 
tendency  toward  shifting  will  be  accentuated  or  weakened 
according  to  the  rate  of  the  progression  or  regression. 

n.  If  the  object  is  a  final  good,  a  tax  once  shifted  to  the 
consumer  will  stay  there.  But  if  it  be  a  commodity  used  in 
further  production,  the  whole  case  is  reopened,  and  all  the 
other  conditions  may  come  in  to  determine  whether  or  not 
the  tax  shall  be  shifted  to  the  second,  the  third  or  the  final 
consumer. 


CHAPTER  II 
TAXES  ON  AGRICULTURAL  LAND 

THE  assertion  is  frequently  made  that  the  American  farmers 
are  taxed  out  of  all  proportion  to  their  ability  to  pay.  This 
is  due  chiefly  to  the  fact  that  they  have  to  assume  to  a  large 
extent  the  burdens  of  other  taxpayers.  Outside  of  the  rural 
districts  the  great  mass  of  personal  property  consists  of  in- 
tangible personalty,  which,  as  a  rule,  escapes  taxation  almost 
completely.  In  the  rural  districts,  on  the  other  hand,  the 
great  mass  of  personalty  consists  of  visible  tangible  property 
used  by  the  agricultural  communities.  The  country  land- 
owner, who  is  generally  assessed  also  on  his  visible  person- 
alty, must  thus  pay,  over  and  above  his  just  proportion  of  the 
public  dues,  an  additional  share  which  ought  to  have  been 
assumed  by  the  owners 'of  intangible  personalty.  What  is  a 
real  property  tax  in  the  rest  of  the  state  becomes  a  general 
property  tax  for  the  farmer.1 

The  force  of  this  contention  is  denied  in  the  commonly 
accepted  doctrine  that  the  tax  on  the  farmer's  property  is 
diffused  throughout  the  community.  The  farmer,  it  is  said, 
will  add  the  tax  to  the  prices  of  the  products  of  his  farm,  and 
will  in  this  manner  recoup  himself  for  his  original  outlay. 
The  tax  will  thus  be  shifted,  so  runs  the  argument,  from  the 
producer  to  the  consumer ;  since  every  one  is  a  consumer, 
the  tax  will  virtually  fall  on  the  community  at  large,  and  is 
hence  a  just  and  equal  tax. 

This  argument  is  not  a  strong  one,  although,  strange  to 
say,  its  chief  weakness  has  not  hitherto  been  pointed  out. 

1  Cf.  the  article  on  "  The  General  Property  Tax,"  in  Seligman,  Essays  in  Taxa- 
tion, pp.  27-33. 

220 


Taxes  on  Agricultural  Land  221 

Even  granting  for  the  moment  that  the  tax  will  be  shifted 
in  its  entirety,  by  being  added  to  the  prices  of  agricultural 
products,  it  would  fall  on  individuals  only  so  far  as  they  were 
consumers  of  these  products,  In  other  words,  if  this  were 
the  only  tax,  it  would  be  a  tax  on  consumption  —  that  is, 
on  expense.1  Now,  of  all  bases  of  taxation  expenditure  is 
undoubtedly  the  least  equitable.  What  a  man  spends  is  no 
criterion  of  what  he  is  able  to  contribute  to  the  burdens  of 
the  state.  It  bears  no  fixed  proportion  to  taxable  capacity. 
Whatever  other  tests  we  may  have  of  individual  faculty  — 
whether  property,  product  or  income  —  not  one  of  these  has 
any  definite  relation  to  expenditure.  If  one  man  has  triple 
the  property  or  income  of  another,  but,  whether  through 
thrift  or  miserliness,  spends  only  the  same  amount,  it  surely 
cannot  be  said  that  the  taxable  capacity  of  the  latter  is  equal 
to  that  of  the  former,  especially  if  the  latter  spends  up  to 
a  very  narrow  margin  of  his  revenue,  as  frequently  occurs. 
In  the  one  case  there  is  available  for  future  exigencies  a 
reserve  fund  which  is  entirely  lacking  in  the  other,  that 
completely  alters  its  owner's  obligations  to  the  community. 
Moreover,  it  is  a  well-known  fact  that  differences  in  expendi- 
tures are  rarely  so  great  as  differences  in  property  or  income. 
A  tax  on  consumption  alone  would,  therefore,  fall  with  in- 
creasingly crushing  force  on  all  those  classes  whose  expenses 
swallow  up  almost  their  respective  income,  or  perhaps  even 
encroach  on  their  capital.  It  is  not,  of  course,  here  intended 
to  argue  against  the  advisability  of  taxes  on  consumption  as 
a  part,  and,  because  of  certain  other  advantages,  even  a 
desirable  and  necessary  part,  of  a  tax  system.  The  above 
contention  is  directed  against  expenditure  as  the  theoretical 
basis  of  all  taxation.  A  tax  on  real  estate  alone  is,  accord- 
ing to  this  doctrine  of  incidence,  a  tax  on  expenditure.  It 
reaches  only  the  poorer  classes  of  society,  and  exempts  in 
ever  increasing  proportion  the  earnings  or  the  property  of 

1  This  was  seen  in  the  seventeenth  century  by  Sir  William  Petty,  who  said : 
"  A  land  tax  resolves  itself  into  an  irregular  excise  upon  consumption,  that  those 
bear  it  most  who  least  complain."  See  above,  p.  15. 


222          Shifting  and  Incidence  of  Taxation 

the  wealthy.  So  far  as  the  farmers  themselves  belong  to  the 
poorer  classes  they  would  bear  a  disproportionate  share  of  the 
burdens.  Thus  the  single  tax  on  real  estate,  if  it  were  diffused 
throughout  the  community,  would  be  most  unjust  and  oppres- 
sive. In  reality,  however,  there  is  no  such  general  shifting : 
the  tax  on  the  rural  landowner  often  tends  to  «stay  where  it 
is  put. 

The  question  of  the  incidence  of  the  land  tax  presents 
comparatively  few  difficulties.  Since  the  time  of  Ricardo  it 
has  been  treated  frequently  and,  on  the  whole,  with  success. 
But  it  is  remarkable  that  the  writer  who  has  discussed  the 
subject  with  the  greatest  clearness  and  subtlety  from  the 
abstract  point  of  view; — the  Spanish  economist,  Florez- 
Estrada — should  have  remained  practically  unknown  to  this 
day.1  Nevertheless,  both  Florez-Estrada's  and  Ricardo's 
doctrines  require  some  qualification  in  order  to  fit  them  to 
the  actual  conditions  of  every-day  life. 

Theoretically,  there  may  be  five  different  kinds  of  land 
taxes : — 

1.  A  tax  on  economic  rent. 

2.  A  uniform  tax  according  to  the  quantity  or  the  quality 
of  the  land. 

3.  A  tax  on  gross  produce. 

4.  A  tax  on  agricultural  profits. 

5.  A  tax  on  property  or  the. selling  value  of  the  land.2 

I.   A   Tax  on  Economic  Rent 

If  land  is  taxed  according  to  its  pure  rent,  virtually  all 
writers  since  Ricardo  agree  that  the  tax  will  fall  wholly  on 

1  Curso  di  Economia  Politico,.     For  Don  Alvaro  Florez-Estrada.     London, 
1828,  2  vols.     The  quotations  are  from  the  sixth  edition,  published  in  Madrid, 
1848.     An  excellent  French  translation  was  made  by  L.  Galibert,  under  the  title 
Cours  Eclectique  d'Economie  Politique  ecrit  en  Espagnol,  and  published  in  three 
volumes  in  Paris,  1833.     Pantaleoni  is  the  only  writer  who  has  referred  to  Florez- 
Estrada.     But  he  makes  little  effort  to  qualify  any  of  the  conclusions. 

2  Florez-Estrada  makes  a  slightly  different  division.     Ibid.,  part  iv,  "  Del  Con- 
sumo  de  la  Riqueza,"  cap.  v,  '  De  la  Contribucion  sobre  la  propriedad  territorial/ 
ii,  p.  328;  in  the  French  translation,  Hi,  p.  223. 


Taxes  on  Agricultural  Land  223 

the  landowner,  and  that  it  cannot  be  shifted  to  any  other 
class,  whether  tenant-farmer  or  consumer.  Since  land  on 
the  margin  of  cultivation  pays  no  rent  in  the  economic  sense, 
and  since  the  no-rent  land  fixes  the  price  of  all  produce,  a 
tax  on  rent  cannot  affect  the  price  of  agricultural  produce, 
and  therefore  cannot  be  shifted.  The  point  is  so  universally 
accepted  as  to  require  no  further  discussion.1 

The  further  question  as  to  how  far  the  tax  on  rent  may  be 
regarded  as  a  burden  on  the  owner,  has  been  discussed  above 
in  treating  of  the  phenomenon  of  capitalization.  It  will  be 
remembered  that  when  the  rate  of  the  tax  exceeds  that  of 
other  taxes,  the  difference  is  not  borne  by  the  new  purchaser, 
but  is  shifted  back  to  the  original  owner.  A  permanent  tax 
on  rent  is  thus  not  shifted  to  the  consumer,  nor  does  it  rest 
on  the  landowner  who  has  bought  since  the  tax  was  imposed. 

A  tax  on  pure  rent,  however,  is  very  rare.  The  more 
difficult  questions  arise  when  the  tax  is  assessed  so  as  to 
include  not  only  the  rent  of  the  landowner  but  the  profits 
of  the  tenant  farmer,  or,  as  the  case  would  be  in  America, 
where  landowner  and  farmer  are  one,  where  the  tax  is 
assessed  according  to  the  value  of  the  property.  For  the 
market  price  of  land  is  equal  to  the  capitalized  value  of  its 
economic  rent  plus  the  profits  of  agricultural  capital. 

Ricardo  maintained  that  if  a  land  tax  is  assessed  on  all  land 
indiscriminately,  or  if  it  is  proportioned  to  the  quality  of  the 
land,  it  will  always  be  a  tax  on  produce,  and  will  consequently 
raise  prices  to  the  consumer.  This  doctrine  has  generally 
been  adopted  by  his  successors.  In  reality,  however,  the 
matter  is  not  so  simple. 

Let  us  consider  the  cases  in  turn,  taking  up  next  — 

1  Ricardo,  Principles  of  Political  Economy  and  Taxation,  chap.  10.  We  do 
not  here  enter  upon  the  purely  theoretical  discussion  as  to  the  incidence  of  a  tax 
not  on  rent  in  general,  but  on  some  particular  kinds  of  rent.  Abstractly,  it  would 
be  possible  to  tax  land  suitable  for  raising  a  special  kind  of  crop,  and  to  exempt 
it  as  soon  as  it  were  used  for  some  other  kind  of  crop.  Such  a  tax  on  rent  would 
be  akin  to  a  tax  on  the  profits  of  some  particular  occupation,  as  opposed  to  a  tax 
on  profits  in  general,  and  would  tend  to  be  shifted  to  the  consumer.  But  such 
a  tax  on  rent  is  hardly  more  than  a  theoretical  possibility. 


224          Shifting  and  Incidence  of  Taxation 

2.    A  Uniform  Tax  according  to  the  Quantity  or  the  Quality 

of  the  Land 

In  this  case  there  are  four  possible  results,  namely :  (i)  not 
only  the  tax  but  a  sum  over  and  above  the  tax  may  be  shifted 
to  the  consumer;  (2)  the  exact  amount  of  the  tax  may  be 
shifted  to  the  consumer;  (3)  the  tax  may  be  divided  between 
the  producer  and  the  consumer ;  (4)  the  tax  may  fall  entirely 
on  the  landowner.1 

The  first  case  would  be  that  of  a  fixed  tax  of  so  much  per 
acre  without  distinction  of  value,  as  was  true  in  some  of  the 
American  commonwealths  in  the  eighteenth  century,  espe- 
cially Vermont  and  North  and  South  Carolina.  Suppose 
that  there  are  three  tracts  of  land  producing  wheat  of  the 
same  quality,  but,  as  a  result  of  differences  in  fertility,  yield- 
ing respectively  ten,  twenty  and  thirty  bushels  to  the  acre ; 
and  suppose  further  that  this  quality*  of  wheat  is  worth  50 
cents  a  bushel.  Tract  A  would  thus  yield  $5.00  an  acre, 
tract  B  $10.00  and  tract  C  $15.00.  If  a  tax  of  50  cents  an 
acre  is  imposed  on  all  the  land,  the  owner  of  tract  A  will 
have  to  obtain  for  his  produce  $5.50  or  cease  cultivating. 
But  if  the  price  of  ten  bushels  is  $5.50,  the  price  of  the 
twenty  bushels  produced  on  tract  B  will  have  to  be  $11.00, 
and  that  of  the  thirty  bushels  on  tract  C  $16.50,  since  the 
price  of  the  bushel  will  always  be  fixed  by  the  expenses  of 
cultivation  on  tract  A  —  that  is,  55  cents.  The  owner  of 
tract  B  will  thus  pay  in  taxes  50  cents  more  than  before, 
but,  assuming  that  the  demand  is  constant,  will  obtain  from 
the  public  $1.00  more  than  before,  that  is,  he  will  make  the 
consumer  pay  to  him  something  more  than  the  amount  of 
the  tax.  Again,  the  owner  of  tract  C  will  pay  in  taxes  50 
cents  more  than  before,  but  will  obtain  from  the  public  $1.50 
more  than  before.  A  uniform  tax  on  quantity,  therefore, 
inevitably  takes  out  of  the  pockets  of  the  consumers  more 
than  it  puts  into  the  hands  of  the  tax  collector.2 

1  Cf.  Florez- Estrada,  op.  cit.;  French  translation,  iii,  pp.  221  et  seq. 

2  Ricardo  called  attention  to  this  in  chapter  xii  of  his  Principles. 


Taxes  on  Agricultural  Land  225 

The  second  case  occurs  when  the  tax  is  not  laid  uniformly 
according  to  the  quantity  of  land,  but  is  graded  at  various 
rates  per  acre  according  to  the  quality  of  the  land  —  as,  for 
instance,  in  Kentucky  and  Connecticut  during  colonial  times. 
Thus,  if  in  the  above  case  the  tax  per  acre  on  grade  A  were 
50  cents,  on  grade  B  $1.00  and  on  grade  C  $1.50,  then  not 
only  would  the  price  of  wheat  remain  as  before  at  55  cents 
per  bushel,  but  the  amount  of  taxes  paid  by  the  landowners 
would  exactly  equal  the  increased  price  obtained  from  the 
consumers.  Hence,  whenever  a  land  tax  is  graded  so  as  to 
follow  with  precision  the  differential  advantages  of  produc- 
tion, and  where  the  land  is  cultivated  intensively  up  to  the 
point  when  the  law  of  diminishing  returns  becomes  effective, 
given  a  constant  demand,  the  tax  will  be.  shifted  entirely  to 
the  consumers,  without  causing  them  any  additional  loss.  In 
practice,  of  course,  such  gradation  of  the  tax  has  always  been 
very  rough,  so  that  it  is  very  unlikely  that  the  exact  amount 
of  the  tax  will  be  shifted  to  the  consumers. 

The  third  case  —  that  of  a  division  of  the  tax  between  the 
producer  and  the  consumer  —  arises  when  the  graded  acreage 
tax  is  imposed  in  such  a  manner  that  the  progression  of  the 
tax  exceeds  the  augmentation  in  price.  If,  for  example, 
grade  A  were  assessed  at  50  cents,  grade  B  at  $1.25  and  j 
grade  C  at  $2  per  acre,  the  consumers  would  still  have  to  pay 
more  than  before  the  imposition  of  the  tax,  but  the  owners  of 
grades  B  and  C  would  make  less  profits  than  before.  The 
jdegree  in  which  the  landowner  and  the  consumer  would  share 
the  tax  would  depend,  other  things  being  equal,  on  the  rate 
of  the  graduation  or  progression  of  the  tax. 

Finally,  the  fourth  case  —  that  of  the  tax  resting  entirely 
on  the  landowner  —  would  occur  on  the  supposition  (which 
manifestly  is  purely  hypothetical)  that  the  lands  of  inferior 
quality  were  free  of  tax.  For  since  such  lands  fix  the  price 
of  wheat,  the  owners  of  better  lands  could  not  raise  the  price ; 
and  since  the  tax  is  imposed  on  acreage,  the  tax  would  simply 
represent  a  diminution  of  their  revenue. 

So  much  for  the  fixed  tax  per  acre  of  land  according  to 
Q 


226  Shifting  and  Incidence  of  Taxation 

quantity  or  quality  —  a  tax  that  is  to-day  virtually  unknown 
in  advanced  communities. 


3.    A   Tax  on  Gross  Produce 

The  most  familiar  example  of  a  land  tax  on  gross  produce 
is  the  tithe.  The  incidence  of  a  land  tax  on  gross  produce 
has  been  most  clearly  discussed  by  John  Stuart  Mill,1  who  at 
first  followed  Ricardo  in  holding  that  a  tithe,  because  it  is 
imposed  on  land  of  all  qualities,  reduces  corn  rents  in  equal 
proportions ;  but  that  in  the  same  proportion  as  corn  rent  is 
reduced  in  quantity,  the  corn  composing  it  is  raised  in  value. 
The  producer  at  the  margin  of  cultivation,  then,  pays  one- 
tenth  of  his  produce  in  kind,  but  since  all  prices  are  fixed  by 
his  produce,  his  nine-tenths  will  sell  for  as  much  as  the 
whole  ten-tenths  previously  sold  for.  At  first,  therefore,  a 
tithe  would  be  shifted  to  the  consumers. 

As  Senior  has  shown,  however,  this  would  be  only  the 
immediate,  not  the  ultimate,  effect.2  The  final  result  would 
be  not  an  increase  of  price,  but  a  diminution  of  production 
and  therefore  a  deduction  from  rent.  It  would  ultimately  be 
a  burden,  not  to  the  consumers,  but  to  the  producers  ;  for  the 
higher  price  of  food  and  of  raw  material  would  tend  to  check 
the  progress  of  the  community,  and  to  lower  to  that  extent 
the  demand  for  land.  This  point  has  been  demonstrated  so 
clearly  by  both  Senior  and  Mill  that  it  is  not  necessary  to 
repeat  their  arguments,  so  familiar  to  all  English-reading 
students.  Moreover,  von  Th linen  has  pointed  out  that  the 
question  whether  a  land  tax  is  shifted  to  the  consumers 
depends  largely  upon  the  character  of  the  population  as  con- 
sumers. In  poor  countries  a  land  tax  would  not  be  shifted 
even  in  first  instance  to  the  consumers,  because  they  could 
not  afford  to  pay  more.  Such  a  tax  would,  then,  simply  lead 

1  This  is  true,  however,  only  of  the  later  editions,  where  Mill  accepted  the  cor- 
rections of  Senior.     Cf.  his  Principles  of  Political  Economy,  book  v,  chap,  iv, 

§§  3,  4- 

2  Political  Economy.     By  Nassau  W.  Senior.     6th  ed.,  1872,  pp.  122-125. 


Taxes  on  Agricultural  Land  227 

to  a  lowering  of  the  standard  of  life  of  the  consumers,  and  to 
a  decrease  in  the  prosperity  of  the  producers.1 

Finally,  the  validity  of  the  doctrine  that  the  tithe,  even  in 
its  immediate  result,  is  shifted  to  the  consumer  depends  on 
the  assumption  that  the  tax  is  a  universal  tax,  applicable  to 
all  the  land.  This  is  not  necessarily  true.  To-day,  for  ex- 
ample, in  England,  owing  to  the  process  of  commutation  of 
tithe,  only  part  of  the  land  is  still  tithable,  so  that,  as  in 
the  case  of  all  partial  taxes,  the  burden  is  borne  by  the 
producer  and  not  by  the  consumer.  Even  if  all  the  land 
were  tithable,  the  presence  of  international  competition,  as 
will  be  shown  later,  would  render  the  tithe  virtually  a  partial 
tax  and  thus  not  susceptible  of  being  shifted  to  the  consumer. 
Wherever  the  tax  on  gross  produce  still  exists  in  civilized 
countries,  it  can  no  longer  be  regarded  as  one  that  is  neces- 
sarily shifted  to  the  consumer. 

4,  5.   A  Tax  assessed  according  to  Net  Profits p,  or  the  Selling 
Value  of  the  Property , 

These  two  bases  of  the  tax  are,  as  has  already  been  indi- 
cated, equivalent ;  for  the  selling  price  of  agricultural  land  is 
nothing  but  the  capitalized  value  of  the  net  profits  ordinarily 
derived  from  its  use.  Theoretically  there  may  be  two  cases  : 
either  the  land  tax  is  a  part  of  a  wider  system  which  taxes 
also  all  other  net  profits  or  all  other  capital  or  property ;  or 
the  land  tax  is  a  single,  exclusive  tax,  while  other  profits  or 
other  classes  of  property  are  exempt. 

In  the  case  of  a  general  tax  on  profits,  or  that  of  a  general 
property  tax,  it  is  difficult  to  see  how  the  land  tax  can  be 
shifted  to  the  consumer.  The  theory  of  its  complete  shifting 
to  the  consumer  assumes  that  the  landholder  at  the  margin 
of  cultivation  will  otherwise  abandon  his  farm,  after  the 
imposition  of  the  tax,  and  transfer  his  capital  and  labor  to 
some  other  occupation.  But  to  this  argument  it  may  be 

1  Der  isolirte  Staat.  Von  Johann  Heinrich  von  Thiinen.  Erster  Theil  (2d 
ed.,  1875),  PP-  326-339. 


228          Shifting  and  Incidence  of  Taxation 

objected  that,  if  all  other  profits  or  property  are  equally 
taxed,  he  will  gain  nothing  by  such  a  transfer.  In  fact, 
under  a  general  tax  there  will  be  no  inducement  for  him  to 
abandon  his  farm.  Since  the  supply  will  thus  not  be  dimin- 
ished, prices  will  consequently  not  rise.  If,  therefore,  a  tax 
on  landed  profits  or  landed  property  were  simply  a  part  of  a 
general  income  tax  or  of  a  general  property  tax,  there  would 
be  no  shifting  of  the  tax.  It  would  tend  to  stay  where  it 
was  placed  in  first  instance. 

It  may  be  asserted,  however,  that  our  property  tax  is 
general  only  in  name,  since  personal  property,  as  has  been 
indicated  above,  is  virtually  exempt  from  taxation  outside 
of  the  rural  districts.  It  may  further  be  said  that  Ricardo 
and  the  other  English  authors  discussed  this  form  of  the  tax 
on  the  assumption  that  it  was  an  exclusive  tax.  Nevertheless, 
it  may  be  affirmed  that,  even  on  the  assumption  that  the  tax 
on  agricultural  profits  or  real  estate  is  an  exclusive  tax,  it 
does  not  necessarily  follow  that  this  will  be  shifted  to  the 
consumer. 

Ricardo' s  theory  would  hold  good  only  on  two  conditions : 
first,  that  there  was  absolute  mobility  of  capital  and  labor ; 
and  second,  that  the  community  in  question  was  so  isolated 
that  the  farmers  could  fix  the  price  of  their  own  produce. 
In  actual  life,  however,  these  conditions  are  far  from  being 
really  existent. 

The  classical  theory  rests  on  the  assumption  that  the  owner 
of  the  worst  land  in  cultivation  will  abandon  the  land  rather 
than  cultivate  it  at  a  loss ;  and  that  the  decrease  of  supply 
will  raise  prices  to  the  consumer.  It  is,  however,  incontro- 
vertible that  an  increase  of  price  often  leads  to  a  decrease  of 
consumption,  which  again  reacts  upon  the  price,  so  that  at 
best  only  a  portion  of  the  tax  may  be  shifted  to  the  con- 
sumer. This  point  has  been  fully  explained  in  the  chapter 
on  general  principles.  Furthermore,  it  is  in  actual  life  fre- 
quently a  difficult  matter  for  producers  to  decrease  the  supply 
of  agricultural  products.  To  those  acquainted  with  the  con- 
ditions under  which  the  cotton  crop  is  grown  in  the  Southern 


Taxes  on  Agricultural  Land  229 

States  of  the  American  Union,  this  is  a  familiar  matter. 
Although  annual  conventions  of  the  cotton  growers  repeat- 
edly resolve  that  the  low  price  of  cotton  is  due  to  over-pro- 
duction, and  that  the  supply  should  be  curtailed,  it  seems 
practically  impossible  to  reduce  the  cotton  acreage.  In  order 
that  any  appreciable  influence  might  be  felt  in  the  price,  it 
would  be  necessary  for  whole  tracts  of  the  lands  at  the  margin 
of  cultivation  to  be  abandoned,  or  to  be  used  for  some  other 
purpose.  Now  this  practically  means  wholesale  ruin  for 
immense  classes,  who  have  perhaps  invested  large  sums  in 
improving  the  land,  which  they  consider  fit  for  only  that  par- 
ticular purpose.  Rather  than  abandon  the  land  they  will 
often  prefer  to  continue  cultivation  at  less  than  the  usual 
profits,  for  the  no-rent  land  is  that  on  which  the  cultivator 
gets  just  sufficient  profits  above  the  cost  to  enable  him  to 
live.  In  other  words,  the  tax  would  often  merely  degrade 
the  cultivators.  Only  when  the  tax  is  so  exorbitantly  high 
as  to  swallow  up  the  whole  rent,  and  all  the  agricultural 
profits,  so  as  to  leave  the  cultivator  an  inadequate  margin  for 
living  expenses,  will  he  abandon  the  land  in  such  large  quan- 
tities as  to  effect  a  material  decrease  of  the  supply.  But  such 
a  tax  is  unusual  in  civilized  communities.  In  other  words,  a 
tax  on  the  landowner,  if  it  be  not  extortionate,  will  simply 
reduce  his  profits.  In  proportion  as  the  theory  of  the  abso- 
lute mobility  of  capital  from  agriculture  to  commerce,  or  from 
one  kind  of  agricultural  investment  to  another,  is  attended 
with  practical  difficulties,  the  process  of  shifting  the  tax  to 
the  consumer  will  be  impeded. 

Secondly  and  more  important,  the  Ricardian  theory  as- 
sumes a  completely  isolated  community.  In  actual  life,  how- 
ever, the  market  value  of  agricultural  produce  is  fixed  by  the 
conditions  of  production  in  widely  separated  localities  or 
countries.  The  imposition  of  a  tax  on  the  landowner  of  any 
one  particular  locality,  therefore,  cannot  change  the  price  of 
the  product.  The  older  theory  seems  to  have  overlooked  the 
facts  of  international  relations.  If  taxes  precisely  identical 
in  character  and  amount  were  imposed  by  all  countries  on  all 


230          Shifting  and  Incidence  of  Taxation 

farmers,  then  indeed,  given  the  complete  mobility  of  capital 
just  discussed,  the  tax  might  be  shifted  to  the  consumer. 
But  this  is  never  the  case.  The  Western  farmer,  the  price 
of  whose  wheat  is  fixed  in  Liverpool  by  the  conditions  of  pro- 
duction in  countries  thousands  of  miles  distant,  will  not  get  a 
whit  more  for  his  products  if  his  taxes  are  doubled.  He,  and 
he  alone,  must  bear  the  burden  of  the  tax.1 

In  fact,  if  the  older  theory  were  absolutely  true,  it  would 
be  virtually  impossible  to  make  the  landowners  or  farmers 
suffer  by  any  land  tax,  provided  it  were  not  levied  expressly 
on  pure  economic  rent.  A  country  might  then  raise  its  entire 
revenue  by  imposing  taxes  on  land  alone,  and  would  in  no 
wise  injure  the  agricultural  interests.  Yet  all  history  has 
proved  the  error  of  this  view.  From  the  day  of  the  exac- 
tions of  the  Oriental  monarchs  and  of  the  later  imperial 
Roman  tax  system  to  the  mediaeval  methods  of  Spain  and 
the  arbitrary  land  tax  of  pre-revolutionary  France,  much  of 
the  misery  of  the  agricultural  classes  must  undoubtedly  be 
attributed  to  the  revenue  system  which  burdened  primarily 
the  farmer.  Implicit  reliance  on  the  Ricardian  doctrine 
might  justify  every  exaction  on  the  farmer,  but  would  in- 
evitably react  on  agricultural  prosperity.2 

Our  conclusion,  hence,  is  that  under  actual  conditions  in 
America  to-day  the  landowner  may  virtually  be  declared  to 
pay  in  last  instance  the  taxes  that  are  imposed  on  his  land. 
At  all  events,  it  is  erroneous  to  assume  any  general  shifting 
to  the  consumer.  To  the  extent  that  our  land  tax  is  a  part  of 
a  general  property  tax,  it  cannot  possibly  be  shifted ;  to  the 
extent  that  it  is  more  or  less  an  exclusive  tax,  it  is  even  then 
apt  to  remain  where  it  is  first  imposed  —  namely,  on  the 
landowner. 

In  England,  where  the  farmer  is  almost  universally  the 
tenant  and  not  the  landowner,  and  where  the  rural  tax  or 

1  Cf.  above,  the  discussion  of  general  principles,  p.  214. 

2  Cf.  De  la  Monnaie,  du  Credit,  et  de  I'Impbt.     Par  Gustave  du  Puynode,  ii, 
P-  '53- 


Taxes  on  Agricultural  Land  231 

rate,  as  it  is  called,  is  levied  according  to  rental  value  and 
imposed  on  the  occupier,  the  question  is  primarily  as  to  the 
incidence  of  the  tax  between  the  landowner  and  the  tenant. 
It  may  be  said  that  the  tax  will  fall  on  the  landowner  in  the 
case  of  pure  competitive  rents,  and  will  be  divided  between  the 
parties  in  the  case  of  non-competitive  rents.  At  any  given 
time,  when  the  tenant  makes  out  his  lease,  he  makes  allow- 
ance for  the  rates  which  are  collected  from  him.  The  rent 
which  he  is  willing  to  give  will  vary  with  the  tax  which  he  is 
compelled  to  pay.  To  this  extent,  the  burden  falls  wholly  on 
the  landowner.  On  the  other  hand,  if,  after  the  lease  has 
been  made  out,  a  change  is  made  in  the  rates,  either  by  law 
or  by  the  working  of  local  causes,  this  increase  necessarily 
falls  on  the  tenant  farmer  who  advances  the  tax.  Still,  this 
is  not  of  much  consequence  in  the  long  run,  because  the  tenant 
will  insist  on  an  allowance  for  the  increase  when  a  new  lease 
is  taken.  On  the  whole,  therefore,  it  may  be  said  that  the 
tax  on  agricultural  land  falls  on  the  landowner,  whether  the 
owner  be  the  occupying  farmer  as  in  America,  or  whether 
owner  and  farmer  are  distinct  personages  as  in  England. 

This  is  true,  however,  only  on  the  assumption  that  the 
rent  is  a  true  competitive  rent.  Thus,  it  has  frequently  hap- 
pened in  England  that  farmers  have  been  charged  a  lower 
rent  than  the  purely  competitive  or  rack  rent.  In  such 
cases,  an  increase  in  the  local  rates  would  fall  on  the  tenant 
and  not  on  the  landlord.  As  Mr.  Goschen  puts  it,  "any 
increase  in  local  burdens  must  fall  on  the  margin  between 
the  actual  rent  and  the  rack  rent,  and  so  far  dimmish  the 
advantage  derived  by  the  farmer  from  his  actual  rent  being 
below  fa  rack  rent ;  until  that  margin  were  exhausted,  it 
would  naturally  be  useless  for  him  to  apply  to  his  landlord 
to  readjust  his  rent." 1  In  the  same  way  a  remission  of  rates 
will  inure  to  the  advantage  of  the  tenant. 

On  the  other  hand  the  recent  depression  of  English  agri- 

1  See  the  analysis  in  Goschen :  "  Draft  Report  to  the  Select  Committee  on 
Local  Taxation  of  1870,"  in  his  Reports  and  Speeches  on  Local  Taxation,  1871, 
esp.  pp,  165,  1 66. 


232          Shifting  and  Incidence  of  Taxation 

culture  has  caused  a  change  in  the  opposite  direction.  The 
remarkable  fall  in  prices  during  the  past  twenty  years  has 
not  only  destroyed  the  margin  between  actual  rents  and 
-economic  or  rack  rents,  but  has,  in  many  cases,  created  a 
margin  on  the  other  side.  Although  the  farmer  has  been 
struggling  to  adjust  his  rent  to  lower  prices,  the  process  has 
been  a  slow  one ;  and  the  fall  in  actual  rents  has  not  kept 
pace  with  the  fall  of  economic  rent  due  to  these  lower  prices.1 
Under  such  conditions,  a  remission  of  rates  would  be  of  all 
the  greater  advantage  to  the  tenant.  In  the  case  of  non- 
competitive  rents,  then,  the  incidence  of  the  tax  is  partly  on 
the  owner  and  partly  on  the  tenant. 

1  Local  Taxation  and  Finance.     By  G.  H.  Blunden.    London,  1895,  P-  42> 


CHAPTER   III 
TAXES  ON  URBAN  REAL  ESTATE 

IN  the  case  of  city  real  estate  it  is  necessary  to  make  a  dis- 
tinction between  the  two  components  of  the  real  estate  tax, 
the  ground  tax  and  the  building  or  house  tax  —  the  tax  on 
the  site  and  the  tax  on  the  structure ;  for  they  are  governed 
by  distinct  principles.  Strictly  speaking,  we  should  have 
drawn  the  same  distinction  in  the  case  of  the  agricultural 
landowner.  But  in  that  case  the  distinction  is  unimportant, 
because  —  in  America  at  all  events  —  the  tenant  is,  in  almost 
all  cases,  the  owner,  and  because  the  value  of  the  farmer's 
buildings  is  generally  of  minor  importance  when  compared 
with  the  value  of  his  land.  So  far  as  this  is  not  true,  how- 
ever, the  principles  now  to  be  discussed  apply  there  also. 

In  American  cities,  where  the  occupiers  of  houses  are  fre- 
quently not  the  owners,  the  real  estate  tax  is  levied  on  the 
owners  of  property ;  and  the  question  of  ultimate  incidence 
concerns  only  the  landlord  and  the  tenant.  In  England, 
where  local  rates  are  levied  with  very  few  exceptions  on 
the  occupiers,1  not  the  owners,  and  are  proportional  not  to 

1  The  local  rates  in  England  are,  theoretically,  assessed  on  the  occupier.  Even 
for  a  long  period  before  the  Elizabethan  poor  law  (43  Eliz.,  chap,  ii),  which  is 
the  basis  of  all  English  local  taxation,  it  was  the  occupier,  and  not  the  owner,  on 
whom  fell  the  duty  of  relieving  the  poor.  Cf.  in  general  the  history  of  local 
assessments  in  Castle,  On  Rating,  chap.  I,  and  a  volume  published  by  the  Poor 
Law  Commissioners  in  1 846  entitled  The  Local  Taxes  of  the  United  Kingdom. 
However,  under  the  Small  Tenements  Act  of  1869  (32  and  33  Viet.,  chap.  41, 
§§  3,  4)  wherever  the  ratable  value  does  not  exceed  £20  in  London,  .£13  in 
Liverpool,  £IQ  in  Manchester  or  Birmingham  or  ^8  elsewhere,  the  owner  may" 
compound  for  the  rate  and  may  be  assessed  instead  of  the  occupier.  Further- 
more, by  the  act  of  1850  (13  and  14  Viet.,  chap.  99),  whenever  the  tenancy  is  for 
less  than  three  months,  the  occupier  may  deduct  the  rate  from  the  rent.  Under 

233 


234          Shifting  and  Incidence  of  Taxation 

capital  value  but  to  rental  value,  the  question  is  more  com- 
plicated because  of  the  peculiar  divisions  of  ownership. 
Thus,  not  only  is  the  occupier  almost  universally  distinct 
from  the  owner  of  the  building,  but  the  owner  of  the  build- 
ing generally  does  not  own  the  land.  Furthermore,  the 
building  owner  usually  does  not  pay  a  ground  rent  to  the 
original  landowner,  but  pays  only  a  leasehold  ground  rent, 
which  changes  from  time  to  time,  to  the  intermediary  who 
has  leased  the  land  on  a  long  rental  and  at  a  fixed  ground 
rent  from  the  original  owner.  In  such  a  case  the  question 
of  the  incidence  of  rates  concerns  several  parties,  —  the  land- 
owner, the  leaseholder,  the  building  owner  and  the  occupier.1 
Such  conditions,  although  rare,  are  not  absolutely  unknown 
even  in  American  cities.  Our  study  of  the  shiftings,  if  true 
at  all,  must  be  applicable  equally  to  the  simple  American 
and  the  complex  English  conditions. 

The  urban  real  estate  tax  is  either  a  pure  land  tax  —  for 
example,  when  laid  on  vacant  lots — or  a  tax  on  both  the  land 
and  the  buildings.  The  latter  is  called  in  America  the  real 
estate  tax,  and  on  the  continent  the  house  tax ;  but  both  of 

these  two  acts  it  has  now  become  the  practice  for  a  part  of  the  tenement  house 
population,  and  even  for  the  inmates  of  flats  and  apartments,  to  have  the  rates 
paid  by  the  landlords.  Nevertheless,  in  default  of  actual  statistics,  it  may  be  said 
that  in  the  English  towns  local  taxes  are  paid  in  first  instance  generally  by  the 
occupiers. 

1  There  are  four  chief  methods  according  to  which  houses  are  built  in  the  Eng- 
lish cities:  (i)  the  freehold  purchase  system,  where  the  builder  simply  buys  the 
lot  outright;  (2)  the  freehold  rent-charge  system  (called  in  Scotland  the  feu-sys- 
tem and  in  Manchester  the  chief-rent  system),  where  the  landowner  sells  the  land 
to  the  builder  and  has  no  reversionary  interest,  but  reserves  a  perpetual  fixed 
yearly  payment  called  the  rent-charge  or  chief;  (3)  the  long-building-lease  sys- 
tem, where  the  builder  takes  a  lease  for  999  years,  at  a  fixed  annual  rent;  (4)  the 
short-building-lease  system  (or  London  leasehold  system),  where  the  landowner 
leases  the  land  to  the  builder,  or  what  is  known  as  an  "  improved  leasehold 
ground  rent."  See  Urban  Rating,  being  an  Inquiry  into  the  Incidence  of  Local 
Taxation  in  Towns.  By  Charles  H.  Sargant.  London,  1890,  chap.  I.  See  also 
Evidence  and  Report  of  the  Select  Committee  on  Town  Holdings,  1886-1890;  and 
Munro,  The  Local  Taxation  of  Chief  Rents,  1891.  Cf.  Local  Taxation  and 
Finance.  By  G.  H.  Blunden.  London,  1895.  See  also  The  History  of  Local 
Rates  in  England.  By  Edwin  Cannan.  London,  1896. 


Taxes  on   Urban  Real  Estate  235 

these  designations  are,  from  the  point  of  view  of  economics, 
incorrect.  The  continental  term  is  wrong  because  the  house 
tax  really  includes  a  tax  on  the  site  as  well  as  a  tax  on  the 
structure.  The  American  term  is  inexact,  because  it  con- 
fuses such  entirely  distinct  taxes  as  the  ground  tax  and 
the  building  tax,  which  are  governed  by  different  laws  of 
incidence. 

The  value  of  a  house,  in  the  ordinary  usage  of  the  word, 
depends  upon  the  value  of  the  structure  plus  the  value  of 
the  lot.  The  value  of  the  structure  itself  is  fixed  by  the  law 
that  governs  the  value  of  commodities  the  supply  of  which 
can  be  increased  at  pleasure,  that  is,  in  the  long  run  it  is 
equal  to  the  cost  of  production,  or  rather  of  reproduction. 
The  rent  of  the  house  proper  is  normally  equal  to  the  inter- 
est on  the  capital  expended  plus  an  annual  sum  which,  when 
capitalized,  will  be  sufficient,  after  paying  all  necessary  ex- 
penses, to  replace  the  capital  by  the  time  the  house  is  worn 
out.  The  laws  which  govern  the  incidence  of  taxes  on 
houses  or  on  house  rents  are,  therefore,  analogous  to  those 
which  govern  the  incidence  of  taxes  on  capital  or  on  com- 
petitive profits.  On  the  other  hand,  the  value  of  the  lot  is 
fixed  in  agreement  with  the  general  principles  of  economic 
rent,  according  to  which  the  price  paid  is  measured  by  the 
superiority  of  situation.1  It  would  be  still  more  exact  to 

1  Pantaleoni,  Traslazione  dei  Tributi,  pp.  208-213,  makes  a  long  argument 
against  confusing  economic  rent  with  the  rent  of  a  city  lot.  With  him  economic 
rent  means  agricultural  rent,  and  is  due  only  to  the  law  of  diminishing  returns; 
while  rent  arising  from  situation  is  not  economic  rent,  but  is  what  he  calls  surplus 
rent  (soprarcddito) .  But  this  surplus  rent  is  simply  another  name  for  profits. 
Rent  proper,  he  maintains,  arises  from  the  fact  that  the  price  of  agricultural  prod- 
ucts is  the  same  while  the  cost  of  production  differs.  Surplus  rent,  or  profits  on 
city  lots,  arises  from  the  fact  that  prices  differ,  while  the  cost  of  production  re- 
mains the  same.  The  English,  he  thinks,  have  improved  upon  the  Germans  and 
French  in  distinguishing  between  land  rent  and  ground  rent;  but  have  not  seen 
that  ground  rent  is  really  not  economic  rent  at  all. 

In  answer  to  Pantaleoni,  it  may  be  said  that  there  is  a  certain  justice  in  his  dis- 
tinction, but  precisely  in  the  opposite  way  from  that  in  which  he  understands  it. 
It  seems  arbitrary  to  confine  economic  rent  to  that  differential  product  of  the  law 
of  diminishing  returns.  Ricardo  himself  saw  this  and  von  Thunen  has  developed 


236          Shifting  and  Incidence  of  Taxation 

make  the  assertion  that  the  value  of  a  city  lot  is  determined 
by  the  general  law  of  price  which  governs  all  those  com- 
modities which  are  not  susceptible  of  an  indefinite  increase 
in  their  supply. 

We  may  consider  four  cases,  corresponding  to  actual 
facts :  — 

1.  The  tax  may  be  levied  on  the  ground  owner  alone, 
without  any  reference  to  a  house  tax  on  the  house  owner. 
This  would  correspond  to  Henry  George's  single  tax.     It 
would  be  in  effect  a  tax  on  ground  rents. 

2.  The  tax  may  be  levied  on  the  house  owner,  who  may  or 
may  not  be  the  ground  owner.    This  is  the  case,  for  instance, 
with  the  "  Hauszinssteuer  "  in  Austria. 

3.  The  tax  may  be  levied  on  the  ground  owner,  who  is  at 
the  same  time  the  house  owner.     This  is  the  condition  of  the 
real  estate  tax  in  the  United  States. 

4.  The  tax  may  be  levied  on  the  occupier.     This  is  true  of 
the  local  rates  and  the  inhabited  house  duty  in  England. 

It  is  with  this  fourth  case  alone  that  the  English  econo- 
mists have  busied  themselves.  On  the  other  hand,  most  of 
the  French  and  German  works  discuss  only  the  second  case. 
Let  us  take  them  up  in  order. 

I.   A  Tax  on  the  Ground  Owner 

The  case  of  a  tax  levied  only  on  the  ground  owner  is 
comparatively  simple.  The  owner  who  leases  his  land  will 
always  endeavor  to  get  as  much  as  possible  for  it.  The 
price  he  gets  will,  in  general,  be  entirely  unaffected  by  the 
imposition  of  a  tax.  For,  since  the  supply  cannot  be  in- 
creased, and  since  there  is  no  question  of  cost  of  production, 

the  idea.  On  the  other  hand,  whatever  truth  there  is  in  what  Sidgwick  calls  the 
static  theory  of  rent  applies  equally  to  the  causes  which  fix  the  rent  of  a  building 
lot.  In  other  words,  instead  of  applying  the  principle  of  economic  rent  to  city 
lots,  it  would  be  more  exact  to  say  that  the  same  causes  which  fix  the  differences 
in  value  of  city  lots  also  fix  those  of  agricultural  lands,  that  is  differences  in  rela- 
tive situation  or  in  relative  fertility  combined  with  differences  in  situation  —  or,  in 
short,  differential  advantages  in  yielding  net  profits. 


Taxes  on   Urban  Real  Estate  237 

the  change  in  price  will  be  effected  only  through  a  change  in 
the  demand.  The  price,  in  other  words,  will  be  fixed  by  the 
degree  of  marginal  utility.  Now,  if  the  demand  for  the  site 
increases  to  such  an  extent  that  the  ground  rent  not  only 
covers  the  new  tax  but  leaves  a  profit  in  addition,  the  tax 
cannot  be  shifted  to  the  lessee.  For  the  price  would  have 
been  the  same  without  the  tax,  since  the  demand  of  the 
lessees  is  not  affected  by  a  tax  on  the  lessor.  The  ground 
owner  will  simply  get  less  net  return  than  he  would  have 
obtained  had  no  tax  been  imposed  —  that  is,  the  tax  will  fall 
on  him.  In  the  same  way,  if  the  demand  for  the  site 
decreases,  the  price  will  diminish  and  the  ground  owner  can 
certainly  not  shift  the  tax.  Moreover,  if  he  sells  the  land  in 
the  meantime,  he  will  lose  again  in  the  diminished  selling 
value  of  the  lot.  Finally,  if  the  demand  remains  the  same, 
there  will  be  no  alteration  of  the  price,  and  the  ground 
owner  will  obtain  less  net  income  than  before  because  of  the 
tax.  Therefore  it  may  be  laid  down  as  a  general  rule  that  a 
tax  laid  on  the  owner  of  the  soil,  or  on  ground  rents,  cannot 
be  shifted.1 

When  the  tax  on  the  ground  rents,  however,  is  assessed 
not  on  the  ground  owner  but  on  the  occupier,  the  results,  as 
we  shall  see  later,  are  somewhat  different. 

1  J.  S.  Mill,  Political  Economy,  book  v,  chap,  iii,  §  6,  argues  that  this  is  true 
only  if  we  assume  an  equivalent  tax  on  agricultural  rent.  He  says :  "  If  a  tax  were 
laid  on  ground  rents  without  being  also  laid  on  agricultural  rents,  it  would,  unless 
of  trifling  amount,  reduce  the  return  from  the  lowest  ground  rents  below  the  ordi- 
nary return  from  land,  and  would  check  further  building  .  .  .  until  increased 
demand  or  diminution  of  supply  .  .  .  had  raised  the  rent  by  a  full  equivalent 
for  the  tax.  But  whatever  raises  the  lowest  ground  rents  raises  all  others,  since 
each  exceeds  the  lowest  by  the  market  value  of  its  peculiar  advantages." 

This  argument  seems  to  err  through  the  assumption  of  a  slow  and  continuous 
gradation  from  agricultural  rents  to  ground  rents.  As  a  matter  of  fact,  there  is 
almost  always  a  sudden  jump  from  the  one  to  the  other.  One  has  only  to  look  at 
the  outskirts  of  the  ordinary  American  town  to  be  convinced  of  the  fact  that  land 
even  only  prospectively  fit  for  building  sites  will  be  kept  idle  sooner  than  be  used 
for  agricultural  purposes.  The  whole  question,  moreover,  has  simply  a  theoreti- 
cal interest,  since  agricultural  lands  are  almost  always  taxed  as  well  as  city  lots. 
Sidgwick,  The  Principles  of  Political  Economy,  book  iii,  chap,  viii,  §  8,  iv,  fol- 
lows Mill. 


238          Shifting  and  Incidence  of  Taxation 


2.   A   Tax  on  the  Hotise  Owner 

Let  us  next  take  up  the  case  where  the  tax  is  imposed  on 
the  house  owner,  irrespective  of  the  question  whether  he 
is  the  landowner.  In  other  words,  let  us  deal  with  the  tax  on 
the  structure,  or,  if  the  tax  is  not  levied  according  to  capital 
value,  with  the  tax  on  building  rent  as  opposed  to  that  on 
ground  rent. 

The  generally  accepted  doctrine  —  that  of  Adam  Smith, 
Ricardo  and  Mill  —  may  be  expressed  as  follows  :  Buildings 
represent  the  investment  of  so  much  capital  and  labor. 
They  require  an  outlay  for  construction,  for  maintenance, 
for  repairs,  for  insurance.  No  one  will  enter  on  the  business 
of  having  houses  built  for  investment  unless,  he  can  count  on 
a  definite  return,  which  must  in  general  be  equal  to  the 
returns  from  capital  invested  in  undertakings  of  approxi- 
mately the  same  nature.  A  tax  imposed  on  the  owners  of 
the  building  will  therefore  generally  be  shifted  to  the  occu- 
piers; for,  if  the  tax  could  not  be  shifted,  it  would  reduce 
the  profits  of  the  owners  below  the  customary  level  in  similar 
investments.  The  result  would  be  a  cessation  of  building 
operations,  a  consequent  scarcity  of  houses  and  a  gradual 
increase  in  the  rent  or  value  of  existing  houses,  until  the 
margin  became  high  enough  to  tempt  the  investor  into 
further  operations.  The  working  of  this  law  of  the  trans- 
ferability  of  capital  is,  of  course,  slower  here  than  in  the  case 
of  quickly  consumable  commodities ;  for  since  houses  are 
more  or  less  permanent,  we  cannot  assume  an  immediate 
diminution  of  supply.  Given  a  stationary  supply  of  houses, 
their  value  or  their  rent  will  rise  only  with  the  slow  increase 
of  population,  that  is,  with  a  relative  diminution  of  the  sup- 
ply. But  in  the  long  run  the  working  of  the  law  is  inevita- 
ble. Such  a  tax  will,  therefore,  be  shifted  to  the  consumer, 
that  is,  to  the  tenant. 

This  doctrine,  which  may  be  called  the  orthodox  opinion, 
requires  qualification  in  some  particulars.  The  two  chief 


Taxes  on   Urban  Real  Estate  239 

reasons  why  the  theory  of  the  inevitable  shifting  of  the  house 
tax  to  the  tenant  is  not  always  true  are  as  follows :  (i)  a  dis- 
tinction should  be  drawn  between  new  and  old  houses ;  and 
(2)  another  should  be  drawn  between  general  and  exclusive 
taxes. 

In  the  first  place,  a  distinction  should  be  drawn  between 
houses  already  constructed  before  the  tax  is  imposed  or 
increased  and  those  built  after  the  imposition  or  increase  of 
the  tax.  It  may  be  argued  that,  since  a  tax  on  new  houses 
is  always  shifted  to  the  occupier  —  for  otherwise  they  would 
not  be  built  —  the  same  reason  applies  to  old  houses ;  for 
a  scarcity  of  houses  will  affect  the  values  and  rents  of  all 
houses,  whether  new  or  old. 

This  argument,  however,  is  not  convincing.  Suppose  that 
a  town,  or  a  portion  of  a  town,  is  for  some  reason  decaying. 
In  such  a  case,  the  values  and  the  rents  of  existing  houses 
will  of  course  fall.  The  owners  of  existing  houses  cannot, 
at  first,  escape  bearing  the  burden  of  the  tax.  They  cannot 
shift  the  tax  to  the  ground  owners,  for  since  the  structures 
are  already  on  the  land,  presumably  under  long  leases, 
the  ground  owners  cannot  be  compelled  by  competition  to 
reduce  their  ground  rents.  Until  the  expiration  of  the  lease 
the  house  owner  certainly  cannot  shift  the  tax  to  the  ground 
owner.  On  the  other  hand,  the  house  owner  will  not  be  able 
to  shift  the  tax  on  the  occupier,  because  no  actual  diminution 
in  the  supply  of  houses  is  possible,  and  because,  by  the  sup- 
position, there  is  no  increase  in  the  demand,  but  rather  the 
reverse.  Not  until  a  condition  of  stable  equilibrium  has  been 
reached  will  the  building  owner  cease  to  bear  the  burden. 
That  is  to  say,  it  will  not  be  a  question  of  equality  of  profits, 
but  simply  one  of  the  existing  relations  of  demand  and  supply. 
Hence,  if  population  is  stationary  or  declining,  a  tax  on  exist- 
ing houses  (and  there  will,  of  course,  be  no  new  houses, 
because  there  will  be  no  demand  for  them)  will  inevitably 
fall  on  the  house  owner.  Furthermore,  if  he  sells  the  house 
he  will  lose  the  capitalized  value  of  the  decrease  of  rent ;  so 
that,  under  the  theory  of  capitalization,  only  the  original 


240          Shifting  and  Incidence  of  Taxation 

owner  will  bear  the  tax  until  there  is  a  still  further  decline  in 
population,  when  the  process  will  repeat  itself. 

Although  the  condition  just  described  may  be  considered 
in  some  sense  exceptional,  it  actually  occurs  in  all  communi- 
ties at  periodically  recurring  intervals.  And  although  the 
reasoning  would  not  be  applicable  to  the  general  conditions 
of  progressive  society  where  new  houses  are  being  continually 
built,  the  distinction  is  of  sufficient  importance  to  invalidate 
the  hard  and  fast  rule  of  the  older  economists. 

Another  objection,  which  is,  however,  less  tenable,  has 
recently  been  raised  against  the  older  doctrine.  Pantaleoni 
in  Italy  and  Sidney  Webb  in  England  maintain  that  a 
tax  on  the  building  owner  tends  to  be  shifted,  not  on  the  ten- 
ant, but  on  the  ground  owner.  Pantaleoni  claims  that  this 
must  necessarily  happen  because,  if  the  tax  were  to  fall  on 
the  house  owners,  they  would  build  no  more  houses,  and 
would  thus  effect  a  decrease  in  the  demand  for  building 
lots,  which  would  result  in  a  depreciation  of  the  value  of  the 
land.1 

This  argument  seems  to  rest  on  a  misconception.  It  is, 
indeed,  true  that  the  building  owners  will  not  bear  the  tax. 
But  what  reason  is  there  for  assuming  that  the  mere  cessa- 
tion of  building  operations,  which  would  ensue  on  the  impo- 
sition of  the  tax,  will  cause  a  depreciation  in  the  value  of  the 
lot?  The  non-construction  of  new  houses  cannot,  of  itself, 
cause  the  ground  rents  of  existing  houses  to  fall ;  it  can  only 
prevent  a  further  increase  in  the  value  of  the  land,  or  per- 
haps, at  most,  bring  about  a  fall  in  the  value  of  vacant  lots. 
Until  the  old  leases  run  out,  the  ground  rents  of  occupied 
lots  are  not  apt  to  fall,  even  if  population,  and  therefore 
demand,  diminishes.  Much  less  will  they  fall  if  simply  a 
tax  is  imposed.  Even  after  the  old  leases  run  out,  the  ground 
rents  will  not  fall  unless  the  taxes  on  the  houses  are  so 
extraordinarily  high  that  the  building  owners,  who  have  the 
privilege  of  renewal,  will  prefer  to  abandon  their  houses 
entirely  rather  than  to  renew  their  leases.  Only  in  this  most 

1  Pantaleoni,  op.  cit.,  pp.  221-223. 


Taxes  on   Urban  Real  Estate  241 

exceptional  case 1  can  the  building  tax  be  shifted  in  part  on 
the  ground  owner.  If,  indeed,  the  law  of  real  estate  were 
changed  so  that  fixtures  to  the  land  would  not  go  with  the 
land,  and  if  houses  could  easily  be  removed  from  plot  to  plot, 
then,  but  only  then,  would  it  be  true  that  a  building  tax 
could  always  be  transferred  to  the  ground  owner  in  the  shape 
of  decreased  ground  rent. 

Mr.  Webb's  argument  is  equally  inconclusive.  He  main- 
tains that  the  ground  landlord  does  not  occupy  a  fixed  posi- 
tion. Land  in  the  neighborhood  of  a  city  has  only  an 
agricultural  value  until  it  becomes  ready  for  splitting  up  into 
building  plots.  But  the  value  of  such  land,  says  Mr.  Webb, 
does  not  pass  imperceptibly  from  agricultural  value  to  the 
building  value.  By  custom  there  is  always  a  great  jump. 
The  landowner,  who  can  in  any  case  get  a  price  much  larger 
than  the  agricultural  value,  Mr.  Webb  continues,  has  a  fixed 
point  of  resistance.  He  will  be  willing  to  take  a  little  less 
than  before  the  imposition  of  the  tax,  since  it  is  merely  a 
question  of  competition  between  the  builder  and  the  owner 
of  land  available  for  building.  Hence  the  incidence  of  a  tax 
on  houses  will  be  the  same  as  that  of  a  tax  on  land — namely, 
on  the  landowner.2 

This  argument  seems  to  be  fallacious  because  it  ignores 
the  fact  that  the  ground  owner  is  in  the  stronger  position. 
As  between  the  landowner  and  the  tenant,  the  tenant  is  the 
weaker  party.3  The  house  builder  knows  in  normal  cases  of 
increasing  demand  that  he  can  more  easily  raise  rents  (since 
demand  increases)  than  compel  the  ground  owner  to  take 

1  This  exceptional  case  is  virtually  the  one  mentioned  by  Professor  Edgeworth 
in  his  example  7  in  the  Economic  Journal,  vii,  p.  645.     He  expresses  it  a  little 
differently,  making  the  exception  consist  in  the  fact  that  the  tax  is  equal  to  the 
original  ground  rent  plus  the  constant  building  rent. 

2  Webb,  in  Report  from  the  Select  Committee  on  Town  Holdings,  etc.,  1890, 
qu.  42-44,  PP-  5»  6. 

8  Bastable,  Public  finance,  book  iv,  chap,  ii,  §  5,  as  well  as  Edgeworth, 
Economic  Journal,  vii,  pp.  66-68,  seems  to  overlook  this  in  expressing  the  opinion 
that  the  tendency  is  for  the  tax  to  be  shifted  to  the  ground  owner.  Graziani, 
Istituzioni,  p.  362,  agrees  with  the  argument  in  the  text  as  over  against  Panta- 
leoni  and  Webb. 
R 


242          Shifting  and  Incidence  of  Taxation 

less  than  the  market  value.  The  landowner  is  not  compelled 
to  part  with  his  land ;  but  the  tenant  is  compelled  to  occupy 
some  apartments.1 

It  would,  therefore,  in  the  main  be  true  that,  given  the 
normal  conditions  of  progressive  society  and  the  continued 
existence  of  prosperity  —  and  apart  from  the  qualification 
to  be  noticed  below  —  the  tax  on  the  building  owner  is 
shifted.  And  since,  as  we  have  just  seen,  the  tax  cannot  be 
shifted  to  the  ground  owner  (except  in  the  rare  case  men- 
tioned),2 it  will  tend  to  be  shifted  to  the  other  party  interested 
—  the  occupier.  In  other  words,  given  an  increased  demand 
for  house  accommodations,  the  rents  of  existing  houses 
will  rise  until  the  supply  of  new  structures  is  equal  to  the 
demand. 

It  may  be  said  that  in  the  meantime  the  house  owners 
have  a  practical  monopoly.  Theoretically,  indeed,  the  house 
owner  himself  would  during  the  interval  bear  the  tax  if  the 
rise  of  rents  were  due  solely  to  increase  of  population,  be- 
cause in  the  face  of  this  increased  demand  he  could  have 
obtained  the  same  rent,  had  the  tax  not  been  imposed.  In 
other  words,  as  in  the  case  of  all  monopolies  where  the  price 
is  fixed  only  by  the  purchasing  power  of  the  consumer,  the 
tax  would  simply  mean  a  diminution  of  the  otherwise  greatly 
enhanced  profits  to  the  house  owner.3  Practically,  however, 
there  is  never  such  an  interval  in  progressive  communities. 
Houses  are  built  continually,  and  if  there  is  temporarily  any 
deficiency  in  the  supply,  it  is  owing  to  the  decreased  profits 

1  For  a  fuller  proof  of  the  validity  of  this  statement,  see  below,  p.  253. 

2  Professor  Bastable  advances  another  case  :  "  It  may  happen  that  the  prem- 
ises, owing  to  the  situation,  command  a  monopoly  value,  in  which  case  the  owner, 
having  obtained  the  highest  possible  rent,  must  submit  to  pay  the  public  charges; 
the  mere  building  owner  will  recoup  himself  at  the  ground  landlord's  expense."  — 
Public  Finance,  book  iv,  chap,  ii,  §  5.     But  why  should  the  landowner  take  less? 
The  building  owner  is  in  the  weaker  position,  for  his  building  is  on  the  land,  and 
under  the  law  goes  with  the  land.     Moreover,  as  is  pointed  out  below,  p.  251, 
there  is  no  such  thing  as  a  strict  monopoly  value  of  a  lot. 

3  This  is  the  case  mentioned  by  Ricardo,  Principles,  chap,  xiv,  par.  2  ;  by  John 
Stuart  Mill,  Political  Economy,  book  v,  chap,  iii,  §  6,  par.  3  ;   and  by  Professor 
Edgeworth,  Economic  Journal,  vii,  pp.  50-52. 


Taxes  on   Urban  Real  Estate  243 

of  the  house  owners.  In  order  that  these  profits  may  be 
maintained,  the  tax  on  new  houses  must  fall  where  alone 
there  is  a  margin  for  it  —  that  is,  on  the  rent  paid  by  the 
occupier.  But  since  the  rents  in  the  new  houses  fix  the 
standard  of  rents  in  the  old  houses  (allowance  being  made 
for  the  superiority  of  situation,  which,  however,  has  nothing 
to  do  with  the  building  rent,  but  only  with  the  ground 
rent),  the  owners  of  both  old  and  new  houses  are  able, 
in  the  normal  cases  here  cited  and  in  the  long  run,  to 
shift  the  burden  to  the  tenants.  But  it  must  be  remembered 
that  this  is  true  only  in  the  normal  cases  and  in  the  long 
run. 

The  second  qualification  of  the  doctrine  that  the  building 
tax  will  be  shifted  to  the  occupier  rests  on  the  distinction 
between  a  general  and  an  exclusive  tax.  The  whole  argument 
up  to  this  point  has  been  conducted  on  the  assumption  that 
the  house  tax  is  a  special  or  exclusive  tax.  As  soon  as  other 
forms  of  capital  or  other  profits  of  investments  also  are 
taxed,  the  entire  basis  of  this  argument  falls  away.  This 
has  been  frequently  overlooked  by  those  who  have  attempted 
to  draw  practical  conclusions  from  the  theories  of  the  class- 
ical economists.  The  doctrine  of  the  shifting  of  a  house  tax 
to  the  occupier  depends  on  the  assumption  that  would-be 
house  builders  will  otherwise  prefer  to  put  their  money  in 
non-taxable  investments,  thus  bringing  about  a  scarcity  of 
houses  and  an  increase  of  rents.  But  if  other  capital  or 
profits  are  also  taxed,  there  will  be  no  reason  for  refusing  to 
invest  in  houses.  Hence  rents  and  values  will  not  rise,  and 
the  tax  cannot  be  shifted.  In  other  words,  when  a  house 
tax  is  part  of  a  system  of  taxation  which  reaches  all  other 
kinds  of  property  or  income,  and  taxes  them  at  the  same 
rate,  the  incidence  of  the  tax  will  always  be  on  the  original 
taxpayer  —  that  is,  the  house  owner.  His  profits,  like  those 
of  all  other  capitalists,  will  be  reduced  by  the  tax.  So, 
again,  if  house  property  or  house  rents  are  taxed  at  a  higher 
rate  than  the  property  or  profits  of  other  classes,  only  the 
surplus  above  the  average  rate  of  the  tax  will  be  shifted 


244          Shifting  and  Incidence  of  Taxation 

to  the  occupier,  and  that  only  in  the  normal  cases  already 
mentioned.1 

Our  conclusions  may  be  summarized  as  follows :  If  a  tax  is 
imposed  on  the  building  owner,  it  will  remain  on  him  when 
population  decreases  or  is  stationary,  or  when  the  locality 
decays.  It  will  be  shifted  to  the  ground  owner  only  when 
the  diminution  or  decay  is  so  great  and  the  taxes  so  high  that 
the  building  owner  will  voluntarily  relinquish  the  house  rather 
than  renew  the  lease.  It  will  be  shifted  to  the  consumer  — 
that  is,  the  occupier  —  under  normal  conditions  of  advance 
in  economic  welfare  so  far  as  the  tax  is  an  exclusive  tax. 
Otherwise  only  so  much  will  be  transferred  to  the  occupier  as 
exceeds  the  usual  tax  rate  for  other  property  or  profits,  while 
the  remainder  will  fall  upon  the  house  owner.  The  exact 
proportions  depend  upon  the  general  system  of  taxation  in 
each  particular  country  or  epoch,  and  upon  the  particular 
conditions  of  the  individual  case. 

3.   A   Tax  on  the  Owner  of  House  and  Ground 

We  next  come  to  the  third  case,  where  the  tax  is  levied  on 
the  ground  owner  who  is  at  the  same  time  the  house  owner. 
This  is  the  common  American  system  of  the  real  estate  tax. 
The  question  of  incidence  is  here  only  between  the  owner  and 
the  tenant.  The  problem  is,  therefore,  comparatively  simple, 
as  we  need  only  to  combine  the  conclusions  arrived  at  in  the 
two  preceding  cases. 

So  far  as  the  real  property  tax  may  be  resolved  into  the  site 
tax  and  the  building  tax,  the  tax  on  the  land  when  assessed 
on  the  landowner  will  tend  to  remain,  as  we  have  seen,  where 
it  is  first  put.  The  incidence  of  the  ground  tax,  in  other 
words,  is  on  the  landlord.  He  has  no  means  of  shifting  it; 
for,  if  the  tax  were  to  be  suddenly  abolished,  he  would  never- 

1  The  theory  of  capitalization  of  incidence  is  not  applicable  here,  although, 
remarkable  to  say,  it  has  been  attempted  by  Myrbach,  "Die  Besteuerung  der 
Gebaude  und  Wohnungen  in  Oesterreich,"  Tiibinger  Zeitschrift  fiir  die  gesammtc 
StaatsTjuissenschaft,  vol.  41,  esp.  p.  409. 


Taxes  on   Urban  Real  Estate  245 

theless  be  able  to  extort  the  same  rent,  since  the  ground  rent 
is  fixed  solely  by  the  demand  of  the  occupiers.  The  tax 
simply  diminishes  his  profits. 

The  incidence  of  the  house  tax,  on  the  other  hand,  is  fixed 
by  the  rules  laid  down  above.  The  question,  therefore,  as  to 
how  far  the  real  estate  tax  is  shifted  to  the  occupier  in  Amer- 
ican cities  depends  partly  on  the  actual  existence  or  non- 
existence  of  a  general  property  tax,  partly  on  the  relative 
value  of  the  house  and  the  lot,  and  partly  on  the  peculiar 
circumstances  of  the  particular  piece  of  property. 

If  our  general  property  tax  were  actually  enforced,  the  real 
estate  tax  would  beyond  all  doubt  be  borne  entirely  by  the 
owner.  But  in  American  cities  the  general  property  tax  has 
become  virtually  a  real  property  tax.  In  other  words,  city 
real  estate  bears  the  greater  part  of  the  weight  of  municipal 
taxation.  In  proportion  as  city  houses  are  taxed  at  a  higher 
rate  than  other  capital,  the  main  condition  under  which  the 
tax  may  be  shifted  to  the  occupier  is  present.  If  we  take  the 
small  American  towns,  where  the  investments  are  mainly 
local  and  where  personal  property  is  reached  to  a  fairly  high 
degree,  then  it  is  very  probable  that  the  real  estate  tax  is  not 
shifted  to  the  occupier.  But  the  larger  the  city,  and  thel 
•greater  the  chances  of  investment  outside,  the  less  will  be  I 
the  proportion  of  personalty  taxed,  and  the  greater  will  be 
the  possibility  of  the  shifting  of  a  part  of  the  real  estate  tax. 

The  possibility  that  the  tax  may  be  shifted  turns  into  a 
probability  when  we  remember  that  the  building  tax  tends  to 
form  the  greater  part  of  the  total  tax.  The  average  dwelling- 
house  in  New  York  city,  for  example,  is  worth,  when  first 
built,  from  two  to  three  times  as  much  as  the  lot.  In  the 
tenement  house  districts  the  proportion  is  slightly,  if  at  all, 
less,  except  in  the  case  of  the  tumble-down  wooden  houses, 
which  are  fast  disappearing.  It  is  true,  of  course,  that  with 
the  passage  of  time  the  value  of  the  house  tends  to  decline, 
while  that  of  the  lot  tends  to  increase,  from  which  it  might 
be  inferred  that  the  real  estate  tax  falls  mainly  on  the  owners. 
But  this  tendency  is  materially  counteracted  by  the  fact  that, 


246          Shifting  and  Incidence  of  Taxation 

as  sites  become  more  valuable,  owners  are  apt  to  tear  down 
the  old  structures  and  to  erect  more  expensive,  and  therefore 
more  lucrative,  buildings.  Even  in  the  crowded  business 
centres  it  is  now  becoming  the  custom  to  erect  vast  buildings 
whose  value  considerably  exceeds  that  of  the  ground  on  which 
they  stand. 

Finally,  remembering  the  qualifications  laid  down  above,  it 
may  be  said  that,  while  the  real  estate  tax  falls  on  the  owner 
in  case  of  a  stationary  or  a  declining  population,  a  consider- 
able portion  of  the  tax  is  shifted  to  the  tenant,  in  normally 
prosperous  town  or  city  districts,  under  the  present  adminis- 
tration of  our  property  tax.  When  we  reflect  that  in  the 
city  of  New  York  over  three-quarters  of  the  population  live 
in  tenement  houses,  we  are  thus  forced  to  the  conclusion  that 
in  the  great  cities  a  great  share  of  American  local  taxation  is 
to-day  borne  by  those  least  able  to  pay.  The  greater  the 
extent,  however,  to  which  the  existing  real  property  tax  is 
being  generalized  or  supplemented  by  other  taxes  designed 
to  reach  the  real  ability  of  the  taxpayer,  the  less  probable 
will  be  the  original  shifting  of  the  tax  to  the  occupier.  The 
reforms  in  the  general  conditions  of  American  local  and 
state  taxation  will  thus  indirectly  affect  many  classes  who  at 
present  think  that  they  have  nothing  either  to  gain  or  to  lose 
by  the  process.  The  question  as  to  how  far  these  may  again 
be  able  to  shift  the  tax  on  others  is  a  part  of  the  larger  ques- 
tion of  the  taxation  of  property,  profits  and  wages,  and  will 
be  discussed  later. 

4.    A   Tax  on  the  Occupier 

We  take  up  finally  the  question  of  the  incidence  of  a  tax 
assessed  upon  the  occupier  according  to  the  rent  he  pays. 
This  is  the  system  of  the  English  local  "rate."  Here  again 
we  must  distinguish  between  the  ground  rent  and  the  build- 
ing rent 

Let  us  discuss  first  that  portion  of  the  tax  which  is  theo- 
retically levied  on  the  land.  In  accordance  with  the  general 


Taxes  on   Urban  Real  Estate  247 

principles  laid  down  in  our  discussion  of  the  tax  on  the 
ground  owner,  it  might  seem  that  the  tax  on  rent,  although 
advanced  by  the  occupier,  must  in  the  long  run  be  borne  by 
the  ground  owner.  The  tax  will  be  shifted  by  the  occupier 
to  the  house  owner,  it  is  said,  because,  when  the  tenant  takes 
out  his  lease,  he  will  make  a  deduction,  measured  by  the 
height  of  the  tax,  from  his  rent.  He  will  offer  only  so  much 
rent  as  is  warranted  by  the  superiority  of  the  site ;  and  this 
superiority  is  not  increased  by  the  imposition  of  a  tax.  To 
this  extent,  then,  the  tax  will  fall  on  the  house  owner.  But 
the  building  owner  will  shift  the  tax  to  the  owner  of  the  land. 
As  has  been  said:  "The  builder  calculates  on  a  certain  profit, 
or  else  he  would  not  build ;  he  knows  that  tenants  of  a  cer- 
tain class  can  afford  to  give  a  certain  rent  and  no  more  for  a 
certain  kind  of  house;  and  therefore  if  building  is  to  take 
place  at  all,  it  is  clear  that  the  rates  must  fall  there  where 
alone  a  margin  exists  to  bear  them;  that  is  to  say,  on  the 
price  given,  or  ground  rent  promised  to  the  owner  of  the 
soil."  i 

The  contention,  however,  that  this  part  of  the  tax  falls 
wholly  or  necessarily  on  the  ground  owner,  although  it  has 
been  usually  adopted,  is  partially  incorrect;  and  for  four 
reasons.  These  are  (i)  the  relation  between  rent  and  rates; 
(2)  the  distinction  between  long  and  short  leases;  (3)  the 
relation  between  the  ground  landlord  and  the  building  owner ; 
and  (4)  the  degree  of  elasticity  in  the  demand  for  the  par- 
ticular plot  of  land. 

In  the  first  place,  the  ground  rent  might  be  so  low  and  the 
rates  so  high  that  the  builders  could  not  afford  to  erect  any 
more  houses.  They  could  not  hire  the  land  for  any  less, 
because  the  ground  rents  would  be  so  low  that  the  owner 
would  prefer  to  use  the  land  for  other  purposes  rather  than 
submit  to  a  reduction.  The  result  would  be  a  diminution  in 

1  Goschen,  "  Draft  Report,"  etc.,  op.  cit.,  166.  The  same  idea  is  shared  by  most 
of  the  English  writers.  The  evidence  given  before  the  Select  Committee  on 
Local  Taxation  in  1870  contains  every  possible  view.  Cf.  esp.  questions  1276, 
2739»  32II>  34°4  and  4050. 


248          Shifting  and  Incidence  of  Taxation 

the  supply  of  houses  and  a  consequent  rise  of  rent  to  the 
tenant  or  consumer.  But  this  first  condition  will  arise  very 
rarely,  and  may  be  passed  over  as  unimportant.1 

Secondly,  the  whole  argument  that  this  part  of  the  tax 
falls  on  the  landowner  rests  on  the  assumption  that  at  the 
beginning  of  every  lease  the  lessee  will  demand  that  allow- 
ance be  made  for  the  tax.  This  assumption  is,  however,  not 
of  much  use  in  the  case  of  long  leases.  After  a  long  lease 
has  been  taken  out,  an  unexpected  change  may  occur  in  the 
rates ;  in  fact,  the  growing  tendency  of  modern  local  taxa- 
tion is  toward  an  increase.  The  landowner  who  has  fixed  the 
ground  rent  for  a  number  of  years  will  still  get  this  rent, 
irrespective  of  any  growth  of  rates.  The  increased  burden 
cannot  then  be  shifted  on  him;  it  must  be  borne  by  the 
occupier  who  advances  the  tax.  Not  until  the  expiration  of 
the  lease  will  the  tenant  be  able  to  make  a  new  arrangement 
by  which  he  will  try  to  shift  the  burden  on  the  owner.  Thus, 
only  in  the  case  of  short  tenancies  could  it  happen  that  the 
tax  would  fall  on  the  owner.  In  all  those  cases  —  especially 
numerous  in  England  —  where  the  occupier  rents  for  a  term 
of  years,  the  excess  of  any  rates  beyond  the  amount  calcu- 
lated in  the  original  lease  necessarily  falls  on  the  occupier. 
The  important  point  to  be  noticed  is  the  time  of  the  original 
imposition  of  the  tax  —  a  point  too  often  neglected.  If  the 
owner  was  assessed  for  the  taxes  in  first  instance,  as  in 
America,  there  would  be  no  question  that  this  excess  of 
taxes,  like  the  remainder  of  the  ground  rent  tax,  might  fall 
on  him.  But  if  the  occupier  advances  the  tax,  he  cannot 
improve  his  condition  until  the  expiration  of  the  lease.  In 
England,  then,  the  ground  rent  tax  does  not  fall  wholly  on 
the  owner,  but  at  any  given  time  may  be  borne  in  part  by 
the  occupier. 

Before  taking  up  the  third  and  fourth  limitations  on  the 
theory  that  the  ground  rent  tax  is  shifted  to  the  ground 
owner,  let  us  consider  the  problem  in  its  most  usual  form  — 
the  determination  of  the  incidence  of  a  ground  rent  tax 

1  Mr.  Goschen  himself  makes  allowance  for  this. 


Taxes  on   Urban  Real  Estate  249 

assessed  on  the  occupier  in  the  ordinary  case  of  short  leases, 
In  the  preceding  paragraph  it  has  been  taken  for  granted 
that  at  the  beginning  of  each  short  lease  the  tenant  will  insist 
on  a  reduction  of  the  rent  as  a  compensation  for  the  local 
rates  assessed  upon  him.  Only  on  this  assumption  will  the 
owner  ultimately  bear  the  taxes.  But  is  this  assumption 
always  correct.  The  real  question  is :  Who  bears  the  taxes 
in  the  case  of  short  leases  or  tenancies  by  the  year,  the  quar- 
ter, or  —  as  is  the  case  with  the  majority  of  the  tenement 
house  population  —  the  month  or  the  week  ? 

The  solution  of  this  problem  involves  an  application  of 
the  considerations  affecting  the  general  law  of  value,  as  laid 
down  in  the  preceding  chapter.  From  the  point  of  view  of 
pure  theory  there  are  three  possible  cases.  (A)  where  the 
supply  of  building  lots  is  far  in  excess  of  the  demand,  as  in 
the  suburbs  or  in  sections  of  dwindling  prosperity,  where 
there  are  many  unrented  houses;  (H)  where  the  supply  of 
buildings  on  new  lots  just  about  keeps  pace  with  the  demand  ; 
and  (C)  where  the  supply  of  building  lots  is  exhausted,  and 
the  number  of  houses  may  be  considered  as  constant.1 

Case  A  is  not  attended  with  much  difficulty.  If  the  lot  is 
situated  in  any  outlying  section,  or  in  a  decaying  portion  of  a 
town  where  the  demand  is  slack,  the  tax,  even  if  advanced 
by  the  tenant,  will  be  shifted  to  the  landlord.  The  occupier 
can  afford  to  choose,  and  will  not  voluntarily  assume  the  bur- 
den of  any  one  else.  Being  in  the  stronger  position,  he  will 
not  consent  to  pay  the  higher  rent  due  to  the  imposition  of 

1  A  somewhat  similar  classification  is  given  by  Pierson,  Leerboek  der  Staat- 
huishoudkunde  (2d  ed.,  1896),  pp.  156,  157  and  174-185.  Mr.  Pierson  distin- 
guishes four  cases:  first,  where  there  is  an  abundance  of  building  lots,  as  in 
the  country,  and  where  the  ground  rent  accordingly  amounts  to  little  or  nothing; 
second,  where  the  locality  is  decaying,  and  rents  fall  below  the  ordinary  return  on 
the  capital  invested  in  the  house,  and  where  the  ground  rent  is  also  zero;  third, 
where  there  is  a  rentless  margin  on  the  outskirts  of  the  city  with  an  interior  area 
within  which  ground  rents  form  a  considerable  portion — larger  as  we  approach 
the  centre  —  of  the  total  house  rent;  fourth,  where  all  the  building  lots  are  occu- 
pied, and  where  the  supply  of  houses  may  be  considered  constant. 

This  classification,  it  will  be  seen,  has  many  points  in  common  with  the  dis- 
tinctions in  the  text.  Mr.  Pierson  thinks  that  when  a  tax  is  imposed  on  houses, 


250          Shifting  and  Incidence  of  Taxation 

the  tax.  But  this  will  hold  good  only  so  long  as  the  decay 
is  continuous.  As  soon  as  the  decay  is  arrested,  we  have  the 
conditions  of  case  B,  to  be  discussed  in  a  moment. 

Case  C  likewise  presents  little  difficulty.  Let  us  assume 
the  existence  of  a  walled  town  where  every  plot  is  occupied, 
or  a  section  of  the  city  which,  through  some  combination 
of  circumstances,  is  the  only  one  fitted  for  a  certain  kind  of 
business,  and  where  all  the  land  is  covered  with  buildings. 
In  such  a  case,  the  landowner  has  a  virtual  monopoly,  and 
will  exact  the  highest  rent  that  the  tenant  can  pay.  If  a 
ground  rent  tax  is,  then,  imposed  on  the  tenant,  it  will  be 
shifted  to  the  landowner,  on  the  general  theory  of  taxation 
of  monopoly  profits ;  for,  according  to  the  hypothesis,  the 
landowner  has  already  exacted  the  uttermost  farthing  from 
the  tenant.  Could  the  tenant  pay  an  increased  rent  —  that 
is,  the  old  rent  plus  the  new  tax  on  ground  rent  —  the  land- 
lord would  have  exacted  this  before  the  imposition  of  the  tax. 
In  the  same  way,  a  remission  of  an  existing  tax  on  the  occu- 
pier would  enure  to  the  landowner,  through  an  increase  of 
the  rent  charged  to  the  occupier.  Thus,  in  the  case  of  a 
monopoly  site,  as  well  as  in  the  reverse  case  of  a  site  which 
goes  begging  for  a  tenant,  a  tax  on  ground  rent  assessed  on 
the  occupier  will  be  shifted  to  the  landowner. 

This  case  C,  however,  is  only  of  theoretic  interest.  Practi- 
cally, it  never  exists.  The  mediaeval  walled  towns  which  were 
increasing  in  population  always  reserved  some  vacant  build- 
ing space  within  the  walls.  As  soon  as  this  was  exhausted, 
the  walls  were  enlarged  or  the  surplus  population  was  swept 

the  result  will  be  that  in  the  first  case  the  ordinary  law  applicable  to  manufactured 
commodities  will  obtain;  and  that  in  the  second  and  fourth  cases,  no  influence 
on  house  rents  will  be  perceptible.  The  third  case,  which  he  considers  the  most 
difficult,  he  solves  in  the  following  way :  at  the  margin  —  supposing  that  the  de- 
mand for  new  houses  increases  with  the  growth  of  population  —  rents  will  rise  by 
the  amount  of  the  increase  in  the  cost  of  production,  so  as  to  affect  the  ordinary 
profits  of  the  builder.  This  increased  rent  at  the  outskirts  will  increase  competi- 
tion for  houses  of  the  interior,  and  will  send  rents  up  to  a  point  such  that  the  ex- 
cess of  rent  paid  by  the  occupier  in  the  more  favorably  located  areas  over  that 
paid  at  the  outskirts  will  be  about  the  same  as  before,  or  perhaps  a  little  less  than 
before. 


Taxes  on   Urban  Real  Estate  251 

beyond  the  walls.  In  modern  times,  again,  there  is  no  such 
thing  as  a  strict  monopoly  of  building  sites.  The  ground  rent 
of  even  the  dearest  plot  in  a  crowded  city  exceeds  the  ground 
rents  of  other  plots  only  by  the  value  of  its  relative  superiority. 
Monopoly  implies  absolute  control  of  supply.  Where  build- 
ing lots  shade  into  each  other  by  imperceptible  gradations, 
with  an  abundant  supply  of  the  lower-grade  lots,  we  cannot 
speak  of  an  absolute  control  of  the  total  supply,  but  only  of 
a  control  of  a  part  of  the  supply.  This  is  not  monopoly,  but 
only  the  ownership  of  a  better  grade,  possession  of  which 
gives  a  higher  price,  but  not  a  monopoly  price. 

Let  us,  then,  take  up  case  B,  which  is  the  ordinary  case 
in  normal  communities.  It  is  the  case  of  a  district  growing 
in  population  and  prosperity,  where  there  is  an  ever-increas- 
ing demand  for  building  lots,  but  where  the  increase  of 
ground  rent  is  limited  by  the  possibility  of  utilizing  unbuilt 
land  in  less  favored  sections.  Rents  in  the  crowded  slums, 
or  in  a  favored  business  section,  will  continually  rise ;  but  at 
any  given  moment  the  rise  is  limited  to  the  differential  ad- 
vantages which  a  particular  neighborhood  possesses  over 
other  possible  sites.  With  the  increase  of  population,  there 
is  a  continual  increase  of  house  accommodation  in  the  wider 
periphery.  The  possibility  of  getting  an  equally  good  apart- 
ment a  little  further  off  will  keep  the  rent  of  the  better 
situated  apartment  down  to  the  level  of  the  other,  plus  an 
addition  due  to  the  advantages  of  the  better  situation.  Rents 
in  the  slums  are,  indeed,  higher  than  rents  in  the  suburbs ; 
but  the  former  exceed  the  latter  chiefly  because  of  the  saving 
in  car-fare,  and  because  of  the  assumed  social  benefits  of 
life  in  a  crowded  city.  Any  effort  to  put  rents  above  this 
margin  of  advantage  would  inevitably  fail. 

Here  we  meet  the  considerations  which  we  have  mentioned 
as  the  third  and  fourth  reasons1  for  dissenting  from  the 
ordinarily  accepted  view  as  to  the  incidence  of  a  tax  on 
ground  rent.  The  third  reason  was  the  relation  between  the 
house  owner  and  the  landlord.  When  a  man  rents  a  house 

1  Above,  p.  247. 


UNIVERSIT 


252          Shifting  and  Incidence  of  Taxation 

and  agrees  to  pay  taxes  in  addition  to  the  rent,  he  does  not 
make  a  formal  distinction  between  the  tax  on  building  rent 
and  the  tax  on  ground  rent.  He  is  simply  conscious  of  the 
fact  that  a  house  in  a  better  neighborhood  costs  more  than 
an  equally  good  house  in  a  poorer  neighborhood,  and  that 
the  local  rates  which  he  is  called  upon  to  pay  are  by  so  much 
the  larger.  If  an  additional  tax  is  imposed  on  what  is  theo- 
retically the  ground  rent  portion  of  his  periodical  payment,  it 
may  indeed  happen  that  the  tenant  will  content  himself  with 
meaner  apartments  in  the  same  neighborhood,  or  will  seek 
equally  good  rooms  in  a  less  desirable  locality.  In  such  a 
case,  the  decreased  demand  for  the  original  house  might 
induce  the  house  owner  to  be  satisfied  with  a  lower  total  rent, 
and  he  in  turn  would  endeavor  to  shift  the  loss,  so  far  as  it 
is  due  to  a  tax  on  ground  rent,  to  the  owner  of  the  land. 
But  is  it  true,  as  Adam  Smith  says,  that  "the  more  the 
inhabitant  was  obliged  to  pay  for  the  tax,  the  less  he  would 
incline  to  pay  for  the  ground"  P1  Is  it  not  rather  the  case 
that,  as  we  have  pointed  out  above,2  a  tax  on  the  owner  of 
the  building  can  be  shifted  to  the  owner  of  the  land  only  in 
the  exceptional  case  of  the  tax  being  so  high  as  to  make  the 
house  owner  willing  to  abandon  the  house.  Hence,  even  on 
the  assumption  that  the  tax  will  bring  about  a  change  in  the 
demand  for  particular  houses,  the  burden  will  not  fall  (except 
in  most  unusual  cases)  on  the  landowner,  but  rather  on  the 
building  owner.  Above  all,  the  process  here  described  does 
not  imply  a  shifting  of  the  tax  from  the  occupier  to  the 
building  owner  (or,  in  exceptional  cases,  to  the  landowner). 
Even  though  the  occupier  can  evade  the  tax,  he  cannot  shift 
it.  Evasion,  as  we  know,  is  quite  another  thing  from  shifting. 
The  tax  that  the  occupier  pays  on  his  smaller  rent  will  still 
fall  on  him.  The  landlord  (or  rather  the  "  house-lord  ")  may 
enjoy,  for  the  time  being,  less  revenue  than  before,  but  the 
new  tax  levied  on  the  tenant  will  nevertheless  fall  on  the 
tenant.  A  small  tax  on  smaller  rent  is  just  as  bad  as  a  high 
tax  on  high  rent.  Even  under  the  most  favorable  Jiypothesis, 

1  Wealth  of  Nations,  book  v,  chap.  2.  2  Above,  p.  240. 


Taxes  on   Urban  Real  Estate  253 

then,  we  cannot  speak  of  a  total  shifting  of  the  tax  from 
occupier  to  landlord. 

This  brings  us  finally  to  the  fourth  and  most  important 
consideration — the  question,  namely,  of  elasticity  of  demand. 
Since  the  ground  rent,  as  we  have  seen,  must  be  paid  as  a 
part  of  the  total  rent  of  the  house,  the  problem  is  really  one 
of  the  demand  for  house  accommodation.  Most  writers  who 
have  spoken  of  houses  have  put  them  in  the  category  of 
ordinary  commodities  of  complete  elasticity,  where  a  change 
in  price  immediately  brings  about  a  proportionate  change  in 
demand.  But  this  hypothesis,  upon  which  the  validity  of 
the  reasoning  in  the  preceding  paragraph  depends,  is  of  ques- 
tionable accuracy.1  In  a  preceding  chapter  it  was  pointed 
out  that  in  the  case  of  absolute  necessaries,  as  well  as  in  that 
of  expensive  luxuries,  great  alteration  of  price  goes  hand  in 
hand  with  slight  variation  of  demand.2  House  accommoda- 
tion, now,  is  in  part  an  absolute  necessary,  in  part  an  expen- 
sive luxury.  For  many  classes  of  the  population,  especially 
in  the  congested  areas,  it  is  essential  for  the  tenants  to  be 
near  their  work.  For  one  reason  or  another,  they  prefer  to 
remain  where  they  are.  As  in  the  case  of  all  necessaries,  the 
effect  of  a  tax  will  be  to  cause  them  to  forego  other  things 
rather  than  change  their  residence.  Practically,  it  means  that 
they  will  raise  money  to  pay  the  increased  rent  by  such  expe- 
dients as  taking  in  lodgers  —  that  is,  by  foregoing  some  of 
the  comforts  that  they  have  hitherto  enjoyed.  In  other  quar- 
ters of  the  city,  on  the  other  hand,  comfortable  houses  may 
be  put  in  the  category  of  luxuries.  It  is  a  familiar  fact  that 
many  people  prefer  to  maintain  their  supposed  station  in  life 
at  almost  any  cost.  In  such  cases  a  tax  on  house  accommo- 
dation tends,  as  in  the  case  of  all  taxes  on  luxuries,  to  make 
them  forego  other  things  which  they  deem  less  desirable. 

1  Professor  Edgeworth  {Economic  Journal,  vii,  p.  52)  still  clings  to  this  hypoth- 
esis.    He  concedes  the  opposite  in  the  case  of  the  working  classes ;   but  he  fails 
to  notice  that  this  is  equally  true  of  houses  considered  as  luxuries  rather  than  as 
necessaries. 

2  Above,  p.  189. 


254          Shifting  and  Incidence  of  Taxation 

A  tax,  then,  which  will  bring  about  such  a  displacement  as 
materially  to  affect  the  demand  for  house  accommodation 
must  be  an  extraordinarily  high  one.  Under  usual  conditions 
the  elasticity  of  demand  would  be  apt  to  frustrate  the  action 
of  the  assumed  law  of  complete  shifting.  The  argument  is 
similar  to  the  one  that  has  been  used  in  discussing  the  effect 
of  economic  friction.  Just  as  we  objected  above  to  the 
older  theory  of  the  shifting  of  the  land  tax  to  the  con- 
sumer, because  of  the  untenable  assumptions  of  perfect 
mobility  of  capital  and  territorial  isolation,  so  the  same  objec- 
tion may  be  made  to  the  theory  of  the  necessary  shifting  of 
the  local  rates  from  occupier  to  landlord,  and  largely  because 
of  similar  untenable  assumptions.  As  has  been  well  said, 
economic  rent  is  "  the  rent  which  an  intelligent  tenant  who 
had  an  alternative  investment  for  his  capital  and  mobility, 
and  acquainted  with  the  market  and  his  own  industry,  would 
offer  to  pay."  l  But  the  rent  actually  paid  often  differs  from 
pure  economic  rent.  John  Stuart  Mill  has  pointed  out  that 
in  Ireland  agricultural  rents  are  often  persistently  above  the 
economic  rent,  mainly  because  of  the  lack  of  opportunity  and 
the  lack  of  mobility  on  the  part  of  the  tenant.  In  the  same 
way  the  tenants  in  the  slums  of  large  cities  have  practically 
little  mobility.  They  must  live  in  the  neighborhood  of  their 
work,  they  shrink  from  the  expense  in  moving  from  apart- 
ment to  apartment,  and  their  choice  is  limited  in  a  hundred 
ways.  Here,  as  in  so  many  other  cases,  the  tendency  of  the 
tax  is  to  stay  where  it  is  first  imposed.2 

1  Sidney  Webb  in  Select  Committee  on  Town  Holdings,  1890,  Evidence,  qu.  51. 

2  As  Sir  T.  H.  Farrar  says :  "  Whatever  be  the  theory  on  these  matters,  a  tax 
is  very  apt  to  stick  where  it  first  falls."    Select  Committee,  etc.,  Evidence,  qu.  1246. 
Cf.  Thorold  Rogers :  "  It  is  by  no  means  the  case  that  a  person  who  has  a  tax  im- 
posed upon  him  can  always  impose  the  whole  of  that  tax  upon  his  neighbor." 
—  Ibid.,  qu.  2721. 

Some  of  the  qualifications  of  the  old  doctrine  are  well  put  by  Cliffe-Leslie  in 
the  following  passage :  "  The  doctrine  by  which  eminent  economists  of  our  own 
day  affect  to  determine  the  incidence  of  rates  assumes  .  .  .  that  capitalists  not 
only  know  the  past  and  present  profits  of  all  occupations  and  investments,  but 
foreknow  them  at  remote  periods  —  to  the  end  of  a  long  building  lease,  for  exam- 
ple. Yet  it  is  clearly  impossible  for  persons  contemplating  the  building  or  buying 


Taxes  on   Urban  Real  Estate  255 

We  see,  then,  that  the  incidence  of  a  tax  on  ground  rent 
is  not  the  same  when  the  tax  is  advanced  by  the  tenant  as 
when  it  is  assessed  on  the  ground  owner.1  In  the  latter  case, 
as  in  the  United  States,  it  is  always  borne  by  the  ground 
owner;  in  the  former  case,  as  in  England,  it  is  generally 

of  new  houses  to  foretell,  even  for  twenty  years,  the  profits  that  a  single  investment 
will  yield.  The  movements  of  business  and  population,  the  demand  for  houses 
and  other  buildings,  the  increase  of  wealth  and  money,  and  the  general  range  of 
incomes  and  prices,  the  supply  of  new  houses  on  the  spot,  the  means  of  locomo- 
tion bringing  other  districts  within  reach,  all  defy  calculation.  .  .  .  The  truth  is 
that  the  profits  of  house  property,  the  rents  that  can  be  exacted  from  occupiers,  and 
the  incidence  of  rates,  depend  on  no  such  fiction  as  the  '  average  rate  of  profit/ 
but  on  the  demand  for  and  the  supply  of  houses,  and  these  conditions  vary  from 
time  to  time,  and  from  place  to  place.  .  .  .  The  constant  increase  of  population, 
the  narrow  limits  of  distance  from  their  business  within  which  it  is  convenient  to 
most  people  to  live,  and  the  cost  and  trouble  to  existing  occupiers  of  removal, 
give  the  owner,  in  most  cases,  the  stronger  position,  and  enable  him  to  throw  any 
increase  in  the  rates  on  the  occupier.  .  .  .  The  occupier  of  the  house  pays  all 
the  rent  that  can  be  screwed  out  of  him.  A  little  more  could  be  screwed  out  of 
him  were  there  no  rates,  and  to  that  extent  the  rates  may  be  said  to  fall  on  the 
owner,  the  remainder  being  borne  by  the  workmen."  — "  The  Incidence  of  Im- 
perial and  Local  Taxation  on  the  Working  Classes,"  in  Essays  in  Political  and 
Moral  Philosophy.  London,  1879,  pp.  207-209.  In  the  2d  ed.  under  the  title 
Essays  in  Political  Economy,  London,  1888,  this  passage  may  be  found  on  pp. 
399-401. 

1  One  of  the  most  noteworthy  of  the  recent  writers  to  discuss  the  tax  on  the 
occupier  is  Mr.  G.  H.  Blunden,  in  an  article  on  "  The  Incidence  of  Urban  Rates," 
published  in  the  Economic  Review,  vol.  ii,  Oct.  1891.  Mr.  Blunden's  conclusions 
agree  in  the  main  with  those  expressed  in  the  text,  with  one  exception.  He  seeks 
to  make  a  distinction  between  dwelling-houses,  and  shops  or  business  premises, 
thinking  that  rates  on  shops  in  the  best  situation  fall  on  the  ground  landlord  be- 
cause he  possesses  a  monopoly.  But  in  the  first  place  Mr.  Blunden  really  makes 
no  such  distinction,  because  he  tells  us  (p.  496)  that  rates  on  ordinary  dwelling- 
houses  in  congested  areas  may  also  fall  on  the  ground  owner,  while  in  less  de- 
sirable localities,  rates,  whether  on  dwelling-houses  or  on  shops,  do  not  fall  on  the 
ground  owner.  Mr.  Blunden's  distinction  is  therefore  really  one  between  mo- 
nopoly and  competitive  sites,  not  between  shops  and  dwellings.  But  even  this 
distinction  of  Mr.  Blunden  is  untenable,  for  the  advantages  of  sites  merge  into 
each  other  by  imperceptible  gradations.  The  relative  differences  in  eligibility 
between  an  alleged  monopoly  site  and  a  less  desirable  site  nominally  subject  to 
competition  are  not  altered  in  the  least  by  the  imposition  or  the  remission  of  a 
tax  which  affects  both  sites  proportionally.  In  his  book  on  Local  Taxation  and 
Finance,  London,  1895,  Mr.  Blunden  seems  to  modify  his  distinction  between 
dwelling-houses  and  shops.  See  pp.  55,  56. 


256          Shifting  and  Incidence  of  Taxation 

borne  to  a  considerable  extent  by  the  occupier;  and  only 
in  more  or  less  unusual  cases  is  it  shifted  by  him  to  the 
owner  of  the  house  or  land.  The  exceptional  conditions  are  to 
be  found  in  outlying  or  suburban  districts,  in  decaying  quar- 
ters, and  in  cases  of  extraordinarily  high  taxes.  What  in  the 
older  theory  was  considered  the  rule  thus  turns  out  rather 
to  be  the  exception. 

Let  us  now  leave  the  tax  on  ground  rent  and  proceed  to 
discuss  that  part  of  the  tax  which  is  due  to  the  structure, 
that  is,  the  tax  on  building  rent.  The  argument  here  is 
somewhat  simpler. 

We  have  seen  that  even  if  an  exclusive  tax  is  assessed  on 
the  building  owner,  it  will,  in  normal  cases  of  increasing 
demand,  be  shifted  in  great  part  to  the  occupier.  A  fortiori, 
if  the  tax  is  levied  on  the  occupier,  it  cannot  be  shifted  to  the 
building  owner ;  for  a  tax  paid  by  the  tenant  is  to  all  intents 
and  purposes  a  special  tax.  There  is  no  other  taxable  object 
which  can  be  put  in  the  same  category  as  rent  paid  by  ten- 
ants, unless  it  be  the  interest  paid  by  debtors.  But  we  have 
yet  to  hear  of  any  attempt  to  tax  creditors  by  levying  a  tax 
on  interest  paid  by  debtors.  In  other  words,  in  order  to 
ascertain  the  actual  burden  we  must  add  to  the  nominal  rent 
at  all  events  that  part  of  the  tax  which  is  theoretically  levied 
on  the  structure  apart  from  the  soil.  In  the  long  run  the 
occupier  tends  to  bear  the  tax,  except  in  those  quarters  or 
under  those  conditions  where  the  demand  suffers  a  consider- 
able check,  or  where  we  are  confronted  by  an  absence  of 
competitive  conditions. 

This  holds  good,  of  course,  only  on  the  assumption  that 
the  rate  of  the  tax  is  uniform  on  all  the  houses  concerned. 
To  the  extent  that  the  rates  vary  in  different  parts  of  the 
same  town,  the  excess  in  any  particular  case  tends  to  fall 
ultimately  on  the  owner,  not  on  the  occupier.  This  is  simply 
an  instance  of  a  more  general  law.  If  a  prospective  tenant, 
on  whom  taxes  are  levied  in  first  instance,  has  the  choice  of 
two  houses  of  equal  desirability  but  in  different  parts  of  the 
town,  the  amount  of  the  tax  being  in  one  case  ten  dollars 


Taxes  on   Urban  Real  Estate  257 

more  than  in  the  other,  he  will  certainly  choose  the  latter 
house  or  compel  the  owner  of  the  former  to  forego  ten  dollars 
of  the  rent.  In  England  the  districts  within  which  the  rate 
of  the  tax  is  uniform  are  much  smaller  than  in  America.  It 
frequently  happens  that  different  parts  of  the  same  city,  or 
even  opposite  sides  of  the  same  street,  pay  different  rates 
because  located  in  different  parishes.  In  such  cases  it  is  fair 
to  make  a  distinction  between  the  constant  and  the  variable 
or  differential  part  of  the  building  rate,  the  latter  represent- 
ing the  excess  above  the  rate  that  is  uniform  in  all  the  dis- 
tricts. Only  the  constant  part  of  the  building  rate  will  fall 
on  the  occupier ;  the  remainder  will  be  borne  by  the  building 
owner,  and  in  certain  favorable  cases  will  be  shifted  by  him 
to  the  landowner.  This  variable  element  of  the  building 
tax,  however,  will  in  general  be  very  insignificant  in  amount, 
for  the  reason  that,  even  in  England,  the  normal  differences 
in  the  rates  in  city  districts  which  usually  have  similar  ex- 
penses are  apt  to  be  exceedingly  slight.1  Even  in  such  a 
case,  then,  it  may  be  said  that  the  building  tax  will  fall 
almost  entirely  on  the  occupier.2 

1  The  contention  of  Sargant,  Urban  Rating,  1890,  p.  49,  that  the  differential 
rate  amounts  to  two-thirds  or  even  three-quarters  of  the  total  tax  seems  to  involve 
an  error.     He  terms  "  constant "  rate  only  that  part  of  the  tax  which  is  uniform 
throughout  the  kingdom.    This  is  arbitrary.     In  speaking  of  a  differential  rate  we 
must  always  compare  two  houses  of  equal  desirability  or  in  the  same  neighbor- 
hood; for  it  is  manifestly  impossible  to  say  how  much  of  the  differential  rate  falls 
on  the  structure,  and  how  much  on  the  plot.     We  must  not  compare  a  house  in 
London  with  a  house  in  a  country  parish,  because  there  is  no  competition  be- 
tween them.    The  rule  holds  good  only  within  the  narrow  range  of  houses  sub- 
ject to  the  same  competition. 

2  Fawcett's  discussion  of  this  question  is  unsatisfactory.     He  makes  a  distinc- 
tion between  buildings  in  general  and  those  possessing  exceptional  advantages  of 
situation.     In  the  former  case,  rates,  he  says,  are  a  charge  on  the  occupier;  in  the 
latter,  on  the  ground  owner.     "  For  if  rates  were  remitted,  the  saving  resulting 
would  simply  represent  so  much  added  to  the  ground  rent,  since  rent  is  fixed  by 
the  demand,  and  the  demand  would  not  be  altered  if  rates  were  remitted."     Faw- 
cett's argument  can  be  turned  against  him.     It  may  equally  well  be  said  that, 
given  a  certain  demand  before  rates  were  imposed,  the  levy  of  new  rates  would 
not  change  the  rent  because  it  would  not  change  the  demand.     Hence  the  rates 
would  fall  on  the  occupier  who  pays  them,  and  not  on  the  ground  owner,  whose 

s 


258          Shifting  and  Incidence  of  Taxation 

To  sum  up,  it  may  be  said  that,  when  the  local  real  estate 
tax  is  levied  according  to  rental  value  and  assessed  in  first 
instance  on  the  occupier,  as  is  the  case  in  England,  the  main 
burden  of  the  tax  will  rest  ultimately  on  the  occupier,  not  on 
the  owner  of  the  premises.  For  the  building  tax,  as  we  have 
seen,  will  usually  rest  almost  entirely  on  the  occupier;  and 
the  building  tax  forms  in  almost  all  cases  the  larger  part  of 
the  total  tax.  The  tendency  to  erect  costly  structures  on  val- 
uable sites  is,  indeed,  not  quite  so  strong  in  England  as  it  is 
in  America,  because  of  the  division  of  ownership  between  the 
landlord  and  the  house  owner ;  but  the  tendency  nevertheless 
exists. 

Not  only  does  the  building  tax  normally  fall  on  the  occu- 
pier, but,  as  we  have  seen,  the  ground  tax  will  generally  be 
borne  to  a  very  great  extent  by  the  occupier.  If  we  add  this 
portion  of  the  site  tax  to  what  is  practically  the  whole  of  the 
building  tax,  we  see  that  by  far  the  larger  part  of  the  total 
local  tax  falls  on  the  tenant.  Even  on  the  assumption  that 
the  incidence  of  the  tax  on  structure  is  hypothetically  the 
same  as  that  of  the  tax  on  site,  it  still  remains  true  that  the 
tax  as  a  whole  tends  to  rest  in  considerable  part  on  the  occu- 
pier, for  the  reasons  that  have  been  advanced  in  considering 
the  site  tax.1  The  determination  of  the  exact  proportions  is 
necessarily  impossible.  Here  again,  as  in  the  case  of  the  real 
estate  tax,  it  may  be  said  that  in  a  prosperous  and  progressive 
community  the  tax  tends  to  fall  chiefly  on  the  tenant,  while 
in  decaying  and  unprosperous  districts  the  tax  tends  to  fall 
on  the  owner ;  but  in  all  cases  more  of  the  tax  will  tend  to  be 

rent  is  unchanged.  In  fact,  Fawcett's  whole  distinction  between  these  classes  of 
houses  is  untenable.  Every  house  possesses  "  certain  advantages  or  disadvantages 
of  situation."  The  advantages  merge  into  each  other  by  imperceptible  grada- 
tions. Cf,  the  chapter  on  "  The  Incidence  of  Local  Taxation  "  in  his  Manual  of 
Political  Economy,  6th  ed.,  1883,  especially  p.  618.  On  the  other  hand  the 
commonly  accepted  doctrine  of  Ricardo  and  Mill  fails  to  make  either  of  the  dis- 
tinctions that  have  been  pointed  out  in  the  text,  for  it  states  that  the  ground  tax 
falls  on  the  ground  owner,  and  the  house  tax  on  the  occupier,  —  each  of  which 
statements  is  partially  incorrect,  or,  at  all  events,  inexact. 
1  Above,  pp.  249-255. 


Taxes  on   Urban  Real  Estate  259 

borne  by  the  tenant  when  the  tax  is  originally  imposed  on 
him  than  when  the  tax  is  assessed  on  the  owner.1 

1  It  is  no  wonder,  then,  that  in  England  the  movement  for  the  tax  on  ground 
values,  assessed  on  the  owner,  should  now  be  making  such  rapid  headway.  For 
the  English  system,  with  its  exemption  of  the  landowner  from  special  assess- 
ments for  local  improvements,  and  with  its  casting  so  large  a  share  of  the  whole 
burden  on  the  occupier,  is  assuredly  open  to  criticism.  In  Scotland  and  Ireland 
the  rates  are  generally  divided  between  occupier  and  owner.  The  same  plan  is 
now  also  proposed  in  England. 


CHAPTER    IV 

INCIDENCE  OF  TAXES  ON  PERSONAL  PROPERTY,  ON  CAPITAL 
AND  INTEREST 

WHAT  is  called  personal  property  in  English-speaking  coun- 
tries includes  not  only  capital  in  the  economic  sense,  but  con- 
sumable commodities  not  used  in  production,  like  books  and 
pictures,  and  wealth  of  other  kinds,  like  money.  Taxes  may 
be  imposed  either  on  property  itself  or  on  the  revenue  derived 
from  property.  Since  all  taxes  are  nominally  paid  out  of 
revenue,  it  is  thus  immaterial,  so  far  as  the  question  of  inci- 
dence is  concerned,  whether  we  speak  of  taxes  on  capital  or 
of  those  on  interest  and  profits.  It  has  been  laid  down  as  a 
general  proposition  by  a  recent  writer  that  "  the  taxation  of 
property  is  the  taxation  of  the  property  owner." 1  The  mat- 
ter, however,  is  by  no  means  so  simple  as  is  assumed. 

So  far  as  a  tax  is  laid  on  personal  property  which  is  not 
capital  it  cannot  be  shifted.  For  instance,  if  a  tax  is  imposed 
on  the  permanent  owner  of  luxuries,  like  pictures  or  jewels, 
he,  and  he  alone,  bears  the  burden.  Of  this  nature  are  what 
are  known  in  England  as  the  assessed  taxes  and  in  the  con- 
tinental countries  as  sumptuary  taxes.  Whatever  is  held 
simply  for  enjoyment  and  not  for  sale,  provided  it  is  not  used 
for  productive  or  lucrative  purposes,  is  not  capital.  A  tax  on 
such  property  cannot  be  shifted,  because  the  property  is  not 
sold,  and  because  it  produces  nothing  which  can  be  sold. 
Here,  indeed,  the  taxation  of  property  is  the  taxation  of  the 
property  owner.  On  the  other  hand,  the  incidence  of  a  tax 

1  "  The  Single  Tax."  By  Charles  B.  Spahr.  In  Political  Science  Quarterly, 
vi,  p.  633.  Cf.  the  same  author's  An  Essay  on  the  Present  Distribution  of  Wealth 
in  the  United  States.  New  York,  n.d.  (1896),  p.  154,  note. 

260 


Incidence  of  Taxes  on  Capital  261 

on  capital  or  on  profits  and  interest  is  somewhat  more  com- 
plicated. We  may  conveniently  discuss  the  subject  under 
three  heads :  — 

A.  A  uniform  tax  on  all  capital  or  interest. 

B.  An  unequal  tax  on  all  capital,  or  a  uniform  tax  on  only 
some  forms  of  capital  or  interest. 

C.  A  tax  on  profits. 

It  is  with  this  last  division  only  that  the  English  economists 
have  hitherto  concerned  themselves. 

A.   A   Uniform  Tax  on  all  Capital 

Let  us  frankly  state,  at  the  outset,  that  this  is  only  a 
hypothetical  case.  It  is  the  theory  of  the  American  property 
tax;  but  it  is  not  the  practice,  and  it  can  never  be  the  prac- 
tice. Why  not  ? 

A  tax  on  capital  can  be  unequal  in  two  ways.  There  may 
be  inequality  in  the  rate,  or  there  may  be  inequality  in  the 
taxable  capital.  In  other  words,  the  tax  may  be  assessed  on 
all  capital,  but  in  different  proportions ;  or  it  may  be  assessed 
on  only  some  forms  of  capital.  Now  a  universal  tax  on  all 
capital  is  an  impossibility  in  the  modern  world.  It  might  be 
possible  in  a  completely  isolated  community,  where  all  the 
inhabitants  employed  their  entire  capital  within  the  narrow 
limits  of  the  community ;  but  in  actual  life  it  does  not  exist. 
Not  only  does  the  tax  differ  from  commonwealth  to  com- 
monwealth, but  the  field  within  which  capital  is  employed 
is  as  wide  as  the  world ;  while  the  efficacy  of  any  tax  law 
is  restricted  to  a  particular  state  or  locality.  In  other  words, 
the  international  employment  of  capital  renders  a  tax  on  all 
capital  an  impossibility.  Only  on  the  assumption  that  every 
state  in  the  whole  world  taxed  all  forms  of  capital  alike  could 
we  have  such  a  universal  tax.  But  this  is  most  improbable. 

Secondly,  even  granting  that  there  was  such  a  universal 
tax,  it  would  still  be  unequal  within  the  limits  of  any  particu- 
lar state ;  for,  even  if  the  state  attempted  to  tax  all  forms  of 
capital  at  the  same  rate,  it  could  never  succeed.  Not  only 


262          Shifting  and  Incidence  of  Taxation 

would  there  always  be  some  forms  of  capital  within  the  state 
which,  as  all  experience  has  shown,  would  completely  evade 
taxation,  but  the  same  legal  rate  on  various  kinds  of  capital 
would  inevitably  be  a  different  actual  rate.  This  is  evident 
when  we  consider  the  rate  of  interest.  The  rate  of  interest 
varies  with  different  kinds  of  capital,  according  to  the  security 
of  the  investment,  the  length  of  the  loan,  the  state  of  the 
money  market  and  a  hundred  other  factors.  In  New  York 
state,  for  instance,  during  a  single  year  the  rate  of  interest 
has  varied  from  two  and  a  half  per  cent  on  certain  prime 
bonds  to  a  few  hundred  per  cent  on  loanable  capital  in  Wall 
Street.  A  uniform  rate  of  tax  on  capital  would  thus  result  in 
very  divergent  actual  rates  on  the  interest  or  earnings  of  vari- 
ous forms  of  capital.  Hence,  from  whatever  point  of  view 
we  regard  it,  a  uniform  tax  on  all  capital  is  an  impossibility.1 

Bearing  in  mind,  then,  that  a  uniform  tax  on  capital  is 
only  an  hypothesis,  let  us  endeavor  to  ascertain  its  incidence. 
The  question,  of  course,  can  affect  only  the  capitalist  and 
the  borrower.  As  between  them,  it  is  plain  that  a  uniform 
tax  on  all  capital  must  fall  on  the  lender,  that  is,  on  the 
capitalist.  There  would  be  no  way  for  him  to  shift  the 
burden.  As  it  is  not  to  be  assumed  that  he  would  consume 
his  capital  unproductively,  he  would  attempt  to  reimburse 
himself  for  the  tax  either  by  investing  the  capital  in  some 
business  or  by  lending  it  to  some  one  else.  If  he  invested  it 
in  a  business,  the  demand  for  loanable  capital  would  decrease 
as  much  as  the  supply,  for  he  would  simply  be  doing  what 
the  borrower  would  otherwise  have  done.  The  rate  of 
interest  would  thus  not  rise.  If  he  invested  it  in  fixed 
capital  or  land,  the  rate  of  interest  would  certainly  not  tend 
to  rise;  for  any  large  investment  in  fixed  capital  would  simply 
set  free  so  much  circulating  capital,  that  is,  the  purchase 
price  of  the  fixed  capital.  Under  either  supposition,  there- 
fore, the  tax  could  not  be  shifted. 

There  is  one  case,  of  course,  in  which  the  burden  of  the 

1  Pantaleoni,  Traslazione,  p.  245,  has  called  attention  to  this  fact.  His  whole 
discussion  on  this  point  is  very  noteworthy. 


Incidence  of  Taxes  on  Capital  263 

tax  could  be  partially  evaded.  If  the  tax  on  capital  were  so 
exorbitantly  high  as  to  diminish  the  return  to  the  capital 
below  the  rate  of  what  John  Stuart  Mill  calls  the  practical 
minimum,  further  accumulations  would  be  decidedly  checked. 
An  attempt  would  be  made  by  the  employers  of  capital  to 
improve  production  to  such  an  extent  that  the  enhanced 
profits  would  still  give  them  the  same  net  returns  as  before. 
This  is  sometimes  the  result  of  taxes  on  capital ;  they  act  as 
a  stimulus  to  improved  methods  of  production.  To  the  ex- 
tent that  this  is  not  true,  however,  further  accumulations  of 
capital  would  be  discouraged.  Even  in  such  a  case,  however, 
it  does  not  follow  that  the  tax  would  be  shifted  to  the  borrower. 
The  loss  would  be  felt  by  the  community  at  large  in  the 
shape  of  a  decline  in  general  prosperity.  It  is  impossible  to 
state  in  advance  how  much  of  the  burden  would  be  borne  by 
any  particular  class  of  the  community.1 

B.   An  Unequal  Tax  on  Capital 

Let  us  now  leave  the  realm  of  hypothesis  and  assumption, 
and  come  to  the  facts  of  every-day  life.  The  actual  tax  on 
capital  is,  as  we  have  seen,  everywhere  an  unequal  tax,  how- 
ever equal  it  may  be  nominally.  The  important  question 
thus  is  :  What  is  the  incidence  of  an  unequal  tax  on  capital  ? 
Let  us  discuss  the  incidence  as  between  (i)  the  original 
owner  and  the  new  purchaser ;  (2)  the  present  owner  and  the 
borrower ;  or  (3)  the  producer  and  the  consumer. 

I.    The  Incidence  of  a  Capital  Tax  as  between  Original 
Owner  and  New  Purchaser 

This  whole  subject  is  governed  by  the  law  of  the  capitali- 
zation of  incidence,  which  has  already  been  discussed.2  We 
need  thus  only  repeat  our  former  conclusion.  When  a  new 

1  John  Stuart  Mill,  Political  Economy,  book  v,  chap.  3,  §  3,  comes  to  prac- 
tically this  conclusion  in  discussing  the  tax  on  profits.      Properly  speaking,  the 
argument  is  applicable  to  the  tax  on  capital  or  interest,  as  stated  in  the  text. 

2  Above,  pp.  181-186. 


264          Shifting  and  Incidence  of  Taxation 

or  suddenly  increased  partial  tax  is  imposed  on  certain  kinds 
of  capital,  the  tax,  if  it  cannot  be  shifted  to  the  consumer  of 
the  article,  or  if  it  does  not  lead  to  a  gradual  cessation  of  the 
production  of  the  commodity,  will  be  discounted  in  a  depre- 
ciation of  the  capital  value  of  the  article  by  a  sum  equal  to 
the  capitalized  value  of  the  annual  tax,  and  will  therefore  fall 
on  the  original  owner  of  the  commodity  before  the  tax  was 
imposed  or  increased,  and  not  on  the  new  purchaser.  In 
other  words,  when  two  classes  of  capital  are  taxed  at  unequal 
rates,  the  excess  of  the  tax  above  the  average  rate  tends  to 
be  borne  by  the  original  holder,  because  the  new  purchaser 
pays  so  much  less  for  capital  on  account  of  the  tax.  Other- 
wise he  will  prefer  to  invest  his  money  in  something  else 
which  will  bring  him  the  usual  interest.  It  is  only  when  the 
tax  is  again  increased  that  the  present  owner  is  compelled  to 
bear  the  new  burden.  The  limitations  of  the  doctrine  must, 
however,  not  be  forgotten;1  for  it  is  just  because  of  failure  to 
notice  these  limitations  that  some  writers  have  fallen  into  the 
error  of  assuming  that  a  tax  on  capital  is  always  a  tax  on  the 
capitalist.  If  a  tax  could  not  be  shifted,  or  if  it  could  not 
destroy  the  producer,  who  has  bought  the  business,  then 
indeed  the  excess  of  an  unequal  tax,  or  the  exemption  from  a 
tax,  would  be  capitalized  or  amortized  into  a  change  in  the 
capital  value  of  the  capital  taxed.  But,  as  we  shall  soon  see, 
it  is  an  error  to  assume  that  the  tax  can  never  be  shifted,  or, 
on  the  other  hand,  that  it  can  never  injure  the  purchaser  who 
continues  to  produce. 

2.    The  Incidence  of  a  Capital  Tax  as  between  Debtor  and 
Creditor  or  Borrower  and  Lender 

To  just  the  same  extent  that  it  is  difficult  for  a  capitalist 
to  shift  a  tax  which  is  imposed  on  all  capital,  it  is  easy  for 
him  to  shift  to  the  borrower  a  tax  which  is  imposed  on  only 

1  For  a  fuller  discussion  of  this  doctrine  as  applied  to  an  important  class  of 
capital,  see  the  essay  on  "  Taxation  of  Corporations,"  in  Seligman,  Essays  in  Tax- 
ation, pp.  254-258. 


Incidence  of  Taxes  on  Capital  265 

some  forms  of  capital.  That  is  to  say,  in  the  case  of  an 
unequal  tax  on  capital,  it  is  generally  the  debtor  and  not  the 
creditor  who  suffers.  How  can  this  be  proved  ? 

The  rate  of  interest  on  capital  can  rise  only  through  an 
increase  in  the  demand  for  capital  or  through  a  decrease  in 
the  supply  of  capital.  Some  writers  maintain  that  demand 
will  increase.  It  is  claimed  that  if  a  tax  be  imposed  on  the 
capitalist  lender,  and  if,  accordingly,  the  borrower  be  now 
allowed  to  deduct  from  his  taxable  property  the  amount  of 
the  loan,  the  borrower  will  be  able  to  pay  a  higher  rate  of 
interest.  Since  he  is  no  longer  taxed  on  the  debt,  he  will 
be  able  to  lay  aside  more.  This  will  increase  his  effective 
demand  for  additional  capital.  Because  of  this  increased 
competition  for  capital,  the  rate  of  interest  will  rise,  so  as 
to  leave  the  creditor  uninjured,  notwithstanding  the  imposi- 
tion of  the  tax.1 

This  argument,  however,  as  Rau  has  shown,  is  inadequate.2 
In  the  first  place,  it  is  not  necessarily  true  that  the  borrower 
is  allowed  to  deduct  his  debts  from  his  taxable  property ;  in 
the  American  commonwealths  it  is  frequently  the  rule  that 
debts  cannot  be  deducted  from  personal  property.  Secondly, 
even  if  debts  are  deducted,  it  does  not  follow  that  the  compe- 
tition for  capital  will  increase ;  for  only  a  part  of  the  debts 
will  have  been  contracted  for  industrial  purposes,  while  a 
portion  will  have  been  the  result  of  losses  or  accidents.  An 
amelioration  in  the  condition  of  the  debtor  will  therefore  just 
as  frequently  result  in  a  payment  of  old  debts  as  in  a  con- 
traction of  new  debts.  Thirdly,  if  an  increase  of  the  debtor's 
profits  (due,  for  instance,  to  the  exemption  of  the  debt  from 
taxation)  enhances  the  demand  for  capital,  every  decrease  in 
the  rate  of  interest  would  do  the  same;  and  this  increased 
demand  would  counterbalance  the  decrease  in  the  rate,  so 

1  This  is  the  argument  of  Kroncke,  Grundsatze  einer  gerechten  Bestetierung, 
1819,  pp.  130-138.     Cf.  the  same  author's  Ausfiihrliche  Einleitung  zur  Reguli- 
rung  der  Steuern,  1810,  p.  35. 

2  Rau,  Finanzwissenschaft,  §§  381,  382,  vol.  ii,  pp.  156,  157  (5th  edition).     Cf. 
also  Pantaleoni,  Traslazione  dei  Tributi,  pp.  253-255. 


266          Shifting  and  Incidence  of  Taxation 

that  interest  could  never  permanently  fall.  But  this  is  mani- 
festly untrue.  Hence  the  argument  that  a  tax  on  capital 
will  increase  demand  is  untenable. 

On  the  other  hand,  the  argument  that  the  supply  will 
decrease  is  more  successful;  in  fact,  this  is  the  real  basis 
of  the  whole  theory  of  the  shifting  of  the  capital  tax, 
whether  it  be  a  tax  on  mortgages  or  on  any  other  form  of 
loanable  capital.  The  argument  was  first  advanced  by  Tur- 
got,1  and  rests  really  on  the  fundamental  assumption  of  the 
mobility  of  capital.  Capital,  it  is  said,  shows  its  mobility  in 
two  ways :  if  employed  unremuneratively,  it  will  be  removed 
or  transferred  either  to  some  other  industry  or  occupation 
within  the  country,  which  affords  higher  gains  because  un- 
taxed,  or  it  will  be  removed  to  another  country  where  the 
same  industry  or  occupation  is  not  taxed.  In  other  words, 
there  is  both  an  internal  and  an  international  migration  of 
capital  continually  going  on  —  a  migration  from  industry  to 
industry,  and  one  from  country  to  country.  Capital,  the 
argument  continues,  always  seeks  to  secure  the  highest 
returns.  Impose  a  tax  on  the  capitalist  lender,  and  he  will 
insist  on  an  increase  of  the  rate  of  interest  tantamount  to 
the  tax,  or  else  will  transfer  his  capital  to  some  untaxed  occu- 
pation within  or  without  the  country. 

But  while  it  is  abstractly  true  that  a  special  tax  on  capital 
will  be  shifted  to  the  borrower,  it  often  happens  in  practice 
that  the  assumed  absolute  mobility  of  capital  is  countervailed 
by  other  forces  that  may  be  summed  up  under  the  name  of 
economic  friction.  These  opposing  influences  may  be  clas- 
sified as  follows:  (i)  ignorance  of  the  capitalist;  (2)  diffi- 
culty of  removing  the  capital;  (3)  risk  connected  with  the 
migration  to  other  countries;  (4)  social  or  other  considera- 
tions which  make  for  permanence  of  investment;  (5)  legal 
obstacles. 

Ignorance  of  the  capitalist,  it  may  be  confessed,  is  not  of 
very  material  importance.  In  a  highly  developed  industrial 

1  Turgot,  "  Observations  sur  un  Memoire  de  M.  de  Saint-Peravy  en  faveur  de 
1'Impot  Indirect,"  in  his  (Euvres  (Daire's  ed.),  i,  p.  423.  See  above,  p.  109. 


Incidence  of  Taxes  on  Capital  267 

organism,  under  the  modern  regime  of  interchange  of  thought 
and  communication  of  news,  the  fact  of  extraordinary  profits 
in  any  particular  occupation  cannot  be  long  concealed.  Espe- 
cially the  distinction  which  concerns  us  here  —  that  between 
taxed  and  untaxed  capital  —  must  be  obvious  to  the  average 
investor.  With  the  growth  of  modern  society  the  ignorance 
of  the  investor  is  a  factor  of  continually  decreasing  moment.1 

More  important  is  the  difficulty  of  removing  capital  to  more 
lucrative  employments.  Of  course,  in  the  case  of  loanable 
capital,  as  in  the  stock  exchanges  of  to-day,  this  difficulty  is 
reduced  to  a  minimum.  But  in  proportion  as  the  capital 
assumes  more  and  more  of  a  fixed  character,  its  mobility 
grows  gradually  less.  To  transfer  investments  from  one 
stock  to  another  is  a  very  different  matter  from  abandoning 
all  the  plant  and  machinery  in  one  business  in  order  to  enter 
upon  another  occupation. 

The  risk  connected  with  investments  in  foreign  countries 
is  likewise  not  so  great  as  it  formerly  was.  It  is  indeed 
true  that  creditors,  as  a  rule,  like  to  be  near  their  debtors. 
American  capitalists  prefer  the  less  remunerative  mortgages 
in  the  East  to  the  high  interest-paying  investments  in  the 
Western  states.  Moreover,  it  frequently  happens  that  home 
investors  or  domestic  corporations  are  treated  more  leniently, 
both  as  regards  taxation  and  in  other  respects,  than  foreign- 
ers. It  is  the  survival  of  the  old  law  of  aliens.  This  check 
on  interstate  or  international  transfer  of  capital  is,  however, 
gradually  losing  its  potency. 

Social  considerations  of  various  kinds  often  interpose  a 
more  serious  obstacle.  It  is  not  always  strictly  true,  as  Adam 
Smith  said,  that  "  the  proprietor  of  stock  is  properly  a  citizen 
of  the  world,  and  not  attached  to  any  particular  country." 
Feelings  of  patriotism,  of  local  pride,  of  desire  of  proximity 
to  friends,  of  long  custom  and  old  usage,  sometimes  play  a 
considerable  role.  Although  they  may  be  called  non-economic 

1  For  a  proof  that  it  is  of  some  importance,  cf.  Cliffe-Leslie,  "  On  the  Philo- 
sophical Method  of  Political  Economy,"  in  his  Essays  in  Political  and  Moral 
Philosophy,  pp.  235-237. 


268          Shifting  and  Incidence  of  Taxation 

motives,  they  are  none  the  less  to  be  reckoned  with  by  the 
economist. 

Finally,  the  law  may  prevent  the  free  migration  of  capital. 
Under  the  American  state  bank  laws,  for  instance,  there  was 
very  generally  a  provision  that  banks  could  invest  their 
deposits  only  in  certain  specified  state  securities  or  mort- 
gages. The  large  demand  for  state  mortgages  in  such  cases 
may  have  contributed  toward  lowering  the  usual  interest 
allowed  on  the  mortgage,  and  may  thus  have  prevented  the 
whole  of  the  burden  of  the  tax  from  being  shifted  to  the 
borrower. 

While,  therefore,  it  may  be  laid  down  as  a  general  rule  that 
a  tax  on  loanable  capital  will  be  shifted  from  the  creditor  to 
the  debtor,  the  conditions  which  interfere  with  the  absolutely 
free  mobility  of  capital  may  be  sufficiently  strong  to  prevent 
this  transference  of  the  tax  from  becoming  entirely  complete. 
The  application  of  this  principle  to  the  great  question  of 
taxation  of  mortgages  in  the  United  States  is  obvious. 

3.    The  Incidence  of  a  Capital  Tax  as  between  Producer  and 

Consumer 

This  is  practically  the  same  as  a  tax  on  profits.  The 
investor  of  capital  in  a  productive  industry  does  not  make 
any  but  an  arbitrary  distinction  between  his  interest  and  his 
profits  on  the  investment.  The  rate  of  interest  is  fixed  by 
the  relative  amount  of  loanable  capital,  that  is,  it  is  a  matter 
of  adjustment  between  borrower  and  lender.  But  as  soon  as 
it  becomes  a  question  of  adding  the  tax  to  the  price  of  the 
goods  the  problem  is  the  same  as  that  of  the  tax  on  profits. 
This  topic  is  of  sufficient  importance  to  demand  a  separate 
chapter. 


CHAPTER  V 
TAXES  ON  PROFITS 

IN  discussing  the  incidence  of  a  tax  on  profits,  as  between 
producer  and  consumer,  it  is  necessary  to  make  several  dis- 
tinctions. Profits  may  be  taxed  directly,  as  when  the  tax 
is  imposed  on  the  net  receipts  or  profits  of  the  producer ;  or 
they  may  be  taxed  indirectly,  as  in  the  case  of  a  fixed  license, 
or  of  a  tax  on  stock  in  trade,  or  of  a  tax  on  sales.  Taxes  on 
sales,  however,  may  themselves  be  subdivided  into  two  cate- 
gories. The  producer  may,  in  the  one  case,  be  taxed  on  the 
amount  of  commodities  produced  or  sold  by  him.  This  is 
equivalent  to  a  so-called  indirect  tax  on  commodities.  It  is 
immaterial,  from  the  standpoint  of  incidence,  whether  such  a 
tax  is  raised  from  the  producer  or  from  the  consumer.  In 
the  other  case,  the  producer  may  be  taxed,  not  on  the  quantity 
produced,  but  on  the  gross  receipts  from  sales  —  which  is 
not  necessarily  the  same  thing.  As  an  indirect  tax  on 
profits,  a  tax  on  gross  receipts  occupies,  as  it  were,  an  inter- 
mediate position.  It  is,  in  some  sort,  a  cross  between  a  tax 
on  net  receipts  and  a  tax  on  the  quantity  sold. 

Consequently,  if  we  use  the  term  "  profits  "  in  the  wider 
sense,  to  signify  the  revenue  which  accrues  from  the  sale 
or  exchange  of  commodities,  there  are  really  four  chief  kinds 
of  taxesfcwhich  affect  profits  and  thus  influence  the  relation 
between  producer  and  consumer.  These  are  :  — 

1.  A  tax  varying  with  gross  production  or  gross  amount 
sold. 

2.  A  tax  varying  with  gross  receipts. 

3.  A  tax  varying  with  net  receipts. 

4.  A  tax  of  fixed  amount. 

269 


2  70        '  Shifting  and  Incidence  of  Taxation 


I.   A   Tax  on  Gross  Production  or  Gross  Amount  sold 

This  is  practically  the  same  as  a  tax  on  commodities. 
Whether  the  tax  is  a  so-called  "indirect"  tax,  levied  on  the 
commodities,  or  whether  it  is  levied  on  the  producer  accord- 
ing to  each  unit  produced  or  sold,  is  immaterial.  Thus,  in 
some  of  the  American  commonwealths,  the  taxes  on  sewing- 
machine  companies  or  telephone  companies  are  proportioned 
to  each  sewing-machine  or  telephone  sold  or  produced.  This 
is  the  same,  so  far  as  the  question  of  incidence  is  concerned, 
as  if  an  indirect  tax  had  been  levied  on  each  machine  or 
telephone. 

Let  us  mention  first  the  case  of  a  tax  on  particular  com- 
modities produced  or  sold  under  the  law  of  competition. 
This  case  is  the  normal  one  which  has  been  treated  above  in 
the  chapter  on  general  principles.  We  have,  therefore,  only 
to  repeat  the  general  conclusions  there  reached,1  namely, 
that  the  tax  is  apt  to  be  shifted  to  the  consumer  in  whole  or 
in  part,  but  that  the  degree  to  which  the  tax  is  shifted  varies 
inversely  as  the  elasticity  of  the  demand  and  directly  as  the 
elasticity  of  the  supply. 

In  most  cases  the  tendency  of  an  increase  in  price  is  to 
diminish  the  demand  and,  therefore,  the  output ;  but  if  the 
falling  off  in  demand  is  so  slight  that  the  former  marginal 
producer  still  remains  the  marginal  producer,  or  if  the  margin 
between  the  price  and  the  cost  to  the  more  efficient  producer 
is  so  slight  that  he  cannot  crowd  out  the  former  marginal 
producer,  then  the  whole  of  the  tax  will  be  shifted  to  the 
consumer.  This  is  a  frequent  case  —  perhaps  even  the  ordi- 
nary case  —  under  the  regime  of  competition.  But  conditions 
may  arise  under  which  only  a  part  of  the  tax  will  be  shifted. 
These  conditions  will  be  present  when  an  industry  has  not 
only  reached  the  point  of  diminishing  returns,  but  has  for 
some  time  been  obeying  that  law,  so  that  any  increase  of 
price  due  to  the  tax  will  lead  to  a  smaller  output  with  a  lower 

1  Above,  p.  213. 


Taxes  on  Profits  271 

marginal  cost,  and  therefore  to  a  new  price  below  the  old 
price  with  the  whole  tax  added.1  But  the  same  result  —  the 
incomplete  shifting  of  the  tax  —  will  follow  when,  owing  to 
the  imposition  of  the  tax,  the  former  marginal  producer  is 
now  replaced  by  a  new  marginal  producer  who  can  supply 
the  product  at  a  lower  cost,  and  when  the  new  price  will  now 
be  a  little  (or  perhaps  even  much)  less  than  the  old  price,  or 
the  old  marginal  cost,  with  the  tax  added.  The  ordinary 
conditions  of  progress,  as  we  know,  result  in  a  continual 
crowding  out  of  the  marginal  producer  by  more  favored  com- 
petitors. This  process  will  be  accelerated,  and  the  marginal 
producer  will  be  replaced  more  quickly,  as  we  have  seen : 
first,  when  the  demand  for  the  commodity  is  very  elastic ; 
second,  when  there  is  a  great  difference  in  the  efficiency  of 
the  various  producers ;  and  third,  when  the  industry  obeys 
the  law  of  increasing  rather  than  of  diminishing  returns.2 

To  the  extent  that  the  imposition  of  a  tax  hastens  this 
process,  the  tendency  will  be  that  somewhat  less  than  the 
whole  of  the  tax  will  be  shifted.  For  the  entire  tax  will 
be  shifted  only  so  long  as  the  old  marginal  producer  still 
remains.  To  what  degree,  now,  will  a  tax  accelerate  this 
process  ? 

A  tax  on  output  —  that  is,  on  each  unit  produced  —  will 
normally  affect  the  elasticity  of  the  demand,  and  thus  the 
amount  produced.  If  this  diminution  of  output  is  divided 
proportionally  among  all  competitors,  it  will  not  change  their 
relative  positions.  But  if  there  is  a  great  difference  in  the 
efficiency  of  the  various  producers,  and  if  the  imposition  of 
a  tax,  by  making  it  more  difficult  for  the  marginal  producer 
to  hold  his  own,  brings  about  a  greater  diminution  in  his 
output  than  in  that  of  his  competitors,  the  tendency  for  the 
larger  producer  to  crowd  out  the  smaller  will  be  accentuated; 
and,  because  of  the  economies  in  production,  somewhat  less 
than  the  entire  tax  will  be  added  to  the  price.  If,  however, 
the  movement  toward  concentration  goes  far  enough  to  pro- 
duce a  complete  monopoly,  price  will  be  fixed  by  conditions 

1  See  above,  p.  208.  2  See  above,  pp.  202,  203. 


272          Shifting  and  Incidence  of  Taxation 

of  monopoly  value  to  be  discussed  in  a  moment ;  and  while 
ordinarily  only  a  part  of  the  tax  or  the  whole  tax  will  be 
added  to  the  price,  exceptional  cases  may  occur  where  the 
monopoly  is  so  secure  and  the  demand  so  stable  that  the 
new  price  may  even  exceed  the  old  price  with  the  tax  added. 
A  good  example  of  such  an  exceptional  result  is  the  match 
tax  during  the  Civil  War.1 

When  the  competitive  industry  obeys  the  law  of  increasing 
returns,  it  is  necessary  to  make  a  distinction.  The  fact  that 
an  industry  is  subject  to  the  law  of  increasing  returns  tends, 
as  we  know,  strongly  toward  concentration ;  but  as  long  as 
the  old  competitors  -are  left  —  that  is,  in  the  interval  during 
which  the  old  marginal  producer  continues  to  produce  —  the 
smaller  output,  due  to  the  imposition  of  the  tax,  will  be  sup- 
plied at  a  higher  marginal  cost,  and  the  new  price  will  not 
tend  to  be  less  than  the  old  price  with  the  tax  added.2  But 
after  the  process  has  been  completed  —  if  it  is  ever  com- 
pleted —  and  the  industry  is  now  monopolized,  the  price  may 
not  be  quite  so  high  as  before,  because  under  conditions  of 
monopoly,  other  things  being  equal,  the  influence  of  the  law 
of  increasing  returns  is  to  raise  the  price  by  somewhat  less 
than  the  tax.3  The  interesting  corollary  from  the  above  con- 
siderations is  that  in  the  transitional  cases  of  competitive 
industries  subject  to  the  law  of  increasing  returns,  the  ten- 
dency toward  monopoly  is  checked  rather  than  accelerated 
by  a  tax  on  output ;  while,  in  the  usual  case  of  competitive 
industries  subject  to  the  law  of  diminishing  returns,  the  im- 
position of  a  tax  —  under  certain  conditions  at  least  —  may 
weaken  the  forces  that  oppose  the  tendency  toward  mo- 
nopoly and  may  make  it  more  difficult  for  the  small  producer 
•o  remain  in  business. 

We  may  sum  up,  therefore,  by  saying  that  in  the  case  of 
competition  the  usual  result  of  a  tax  on  output  or  gross 
amount  produced  or  sold  is  that  the  entire  tax  will  be  shifted 
to  the  consumer,  but  that  special  cases  may  arise  where  the 
price  will  be  augmented  by  only  a  part  of  the  tax.  Such 

1  See  below,  p.  283.      2  See  above,  p.  207.      8  See  above,  p.  205. 


Taxes  on  Profits  273 

special  cases  are  chiefly  to  be  found  not  only  when  the 
industry  has  been  obeying  the  law  of  diminishing  returns, 
but  also  when  the  tax  enables  a  more  capable  producer  to 
undersell  his  former  competitors  at  the  margin  of  profitable 
production. 

We  come  next  to  the  case  of  a  monopoly.  The  law  of 
monopoly  value  is,  we  remember,  in  some  respects  different 
from  that  of  competitive  value.  The  monopolist  will  always 
demand  the  very  highest  price  at  which  he  can  sell  the  great- 
est number  of  products.  To  the  extent  that  his  monopoly  is 
complete  he  is  uninfluenced  by  the  fact  that  the  article  might 
be  produced  more  cheaply  by  others,  —  a  consideration  of 
vital  importance  in  the  whole  domain  of  competitive  prices. 
So  far  as  concerns  the  incidence  of  the  particular  tax  with 
which  we  are  at  present  dealing  —  namely,  that  on  gross  pro- 
duction or  on  commodities  —  the  monopolist  and  the  com- 
petitive producer  are,  however,  in  some  respects  subject  to 
practically  the  same  influences. 

If  a  tax  is  imposed  on  every  article  produced,  the  monopo- 
list may  prefer  to  restrict  his  production  and  to  raise  his  price. 
Although  he  sells  less  than  before,  because  of  the  increased 
price,  his  net  profits  may  be  larger,  because  he  pays  a  smaller 
tax  than  he  would  pay  if  he  produced  more  extensively.  Al- 
though his  gross  receipts  diminish,  his  expenses  diminish  still 
more.  If  the  tax  is  small  and  the  demand  is  apt  to  fall  off  a 
great  deal  with  an  increase  of  price,  the  monopolist  will  be 
likely  to  find  it  profitable  to  bear  more  of  the  tax  himself.  If, 
on  the  other  hand,  the  demand  is  less  elastic,  he  will  be  apt 
to  shift  more  and  more  of  the  tax  to  the  consumer.  The 
degree  to  which  he  will  add  the  tax  to  the  price  depends 
chiefly  on  the  height  of  the  tax  as  compared  with  the  extent 
of  the  production  and  the  elasticity  of  the  demand.  In  these 
respects  the  influence  of  a  tax  under  conditions  of  monopoly 
is  akin  to  that  of  a  tax  under  conditions  of  competition.  On 
the  other  hand,  when  the  minor  qualification  of  the  ratio  of 
product  to  cost  is  introduced,  the  analogy  between  conditions 
of  monopoly  and  competition  disappears.  As  we  have  seen, 


274          Shifting  and  Incidence  of  Taxation 

if  the  monopoly  industry  obeys  the  law  of  increasing  returns, 
the  tendency  is  that  less  of  the  tax  will  be  added  than  if  it 
obeys  the  law  of  diminishing  returns;  while  in  the  case  of 
competition  the  tendency  is  the  reverse.1  Since  the  existence 
of  the  law  of  increasing  returns  is  most  favorable  to  the  con- 
tinuance of  a  monopoly,  and  since  the  great  mass  of  so-called 
economic  monopolies  have  become  such  precisely  because 
they  are  subject  to  the  law  of  increasing  returns,  the  con- 
clusion is  warranted  that  in  the  ordinary  cases  of  these 
monopolies  when  a  tax  is  imposed  on  gross  product,  even 
though  the  monopolist  shifts  a  part  of  the  tax  to  the  con- 
sumer, he  will  shift  less  of  the  tax  than  he  would  have  done 
had  he  produced  under  conditions  of  competition. 

The  important  point  to  be  noticed,  however,  is  that  in  the 
case  of  the  taxation  of  gross  product  the  monopolist  may, 
and  generally  will,  shift  the  tax  to  the  consumer,  even 
though  he  shifts  less  of  the  tax  than  would  be  the  case 
if  he  were  not  a  monopolist.  We  shall  very  soon  see 
that  in  the  case  of  some  other  taxes  there  is,  in  respect 
to  the  question  of  incidence,  a  sharp  line  of  distinction  be- 
tween monopoly  price  and  competitive  price.  Even  in  the 
case  of  the  tax  on  gross  product,  however,  there  are  some 
differences  between  the  regime  of  monopoly  and  of  competi- 
tion. One  of  these  differences  is  connected  with  the  consid- 
eration of  the  ratio  of  product  to  cost,  which  has  just  been 
mentioned.  Another  is  that,  in  the  case  of  monopoly,  while 
the  tax  will  ordinarily  be  shifted  in  whole  or  in  part,  it  may 
happen  that  no  part  of  the  tax  will  be  shifted  at  all.2  Let 

1  See  above,  pp.  203-210. 

2  Professor  Graziani,  in  his  Istituzioni  di  Scienza  delle  Finanze,  p.  335,  sub- 
stantially accepts,  on  this  particular  point,  the  argument  in  the  text.     Professor 
Edgeworth,  who  originally  criticised  the  statement  in  the  text  in  the  Economic 
Journal,  vii,  p.  227,  made  the  same  criticism  of  Professor  Graziani's  subsequent 
acceptance  of  this  position  in  a  review  of  the  latter's  work  in  the  Economic 
Journal,  vii,  pp.  405,  406.     Professor  Graziani  came  to  the  defence  of  his  posi- 
tion in  a  reply  entitled  Sulla  Repercussions  delle  Imposte  net  Cast  di  Monopolio, 
published  in  the  Studi  Senesi,  xiv,  p.  5,  and  also  separately  (Turin,  1898).     A 
rejoinder  to  this  by  Professor  Edgeworth  appeared  in  the  Economic  Journal,  viii, 
pp.  234-236. 


Taxes  on  Profits  275 

us  proceed  to  consider  this  possibility  somewhat  more  in 
detail. 

Let  it  be  assumed  that  a  monopolist  can  sell,  at  the  price 
of  $5  each,  1000  units  of  a  particular  article.  Let  it  be 
further  assumed  that  the  cost  of  each  unit  is  $2.  His  gross 
receipts  will  then  be  $5000,  and  his  net  profits  (5  —  2)  x  1000 
=  $3000,  which  may  be  declared  to  be  his  maximum  mo- 
nopoly revenue.  If  he  charged  more,  the  sales  would  fall 
off;  if  he  charged  less,  the  receipts  would  be  smaller.  In 
either  case  his  net  profits  would  diminish.  Let  it  be  assumed 
that,  if  he  charged  $6  a  unit,  the  sale  would  fall  off  to  700 
units.  His  gross  receipts  would  be  6  x  700  =  $4200,  and  his 
net  profits  (6  —  2)  x  700  =  $2800,  or  less  than  before.  If,  on 
the  contrary,  he  charged  only  $4  a  unit,  his  sales  would  in- 
crease, let  us  say,  to  1200  units,  his  gross  receipts  would  be 
$4800,  and  his  net  profits  (4— 2)  x  1200  =  ^2400.  He  will 
therefore  always  prefer  the  price  $5,  which  marks  the  point 
of  maximum  monopoly  revenue. 

If  the  government  now  imposes  a  tax  of  $i  a  unit,  what 
will  be  the  result  ?  The  net  return  on  each  unit  is  reduced 
to  $2,  the  total  net  profits  to  $2000.  If  the  monopolist  at- 
tempts to  add  the  whole  tax  to  the  price,  he  will  sell  only  700 
units ;  and  since  the  cost  per  unit  has  been  increased  by  the 
tax  to  $3,  his  net  profits  will  be  700x^(6  —  3) =$2100.  Grant- 
ing that  this  is  the  highest  net  return  that  the  new  conditions 
admit,  the  monopolist  will  increase  the  price  from  $5  (which 
gives  him  $2000  profits)  to  $6  (which  gives  him  $2100  profits). 
The  entire  tax  will  be  shifted  to  the  consumer. 

On  the  other  hand  suppose  that  the  tax  is  only  ^  of 
a  dollar.  Then  the  cost  per  unit  would  be  $2^,  the  net 
profits  at  price  $5  would  be  (5  —  2j)  x  1000  =  2|  x  1000 
=  $2750 ;  while  the  net  profits  at  price  $6  would  be  (6  —  2^) 
X  700  =  sf  x  700  =  $2625.  Admitting  that  other  prices 
yield  profits  likewise  inferior,  the  monopolist  would  con- 
tinue to  charge  only  $5  ;  that  is,  he  would  not  raise  prices  at 
all. 

It  might  be  said,  however,  that  the  admission  in  the  last 


276          Shifting  and  Incidence  of  Taxation 

sentence  is  not  permissible.1  A  simple  arithmetical  example, 
however,  will  show  that  the  conditions  may  arise  under  which 
any  other  price  than  the  original  one  would  give  the  monopo- 
list less  net  profits. 

Let  it  be  assumed  that,  instead  of  adding  the  whole  tax  to 
the  price,  the  monopolist  adds  only  part  of  it.  Let  it  be  fur- 
ther assumed  that  at  price  $5^  he  will  sell  goo  units ;  at  price 
$5j,  825  units;  at  price  $5f,  750  units;  and,  as  we  have 
already  previously  stated,  at  price  $6,  700  units.  His  net 
profits,  then,  after  a  tax  of  £  of  a  dollar  had  been  imposed, 
would  be :  — 

At  price  5    .     .     .     (5    -  2|)  x  1000  =  2f  x  1000  =  $2750. 

At  price  $£  .     .     .     (si  -  2^)  x    900  =  3    x    900  =  $2700. 

At  price  si.    .    .     (5i-2j)x    825  =  3i  x    800  =  $2681.25. 

At  price  sf  .     .     .     (5i~2|)x    750  =  3!  x    750  =  $2625. 

At  price  6    .    .    .     (6   -  2|)  x    700  =  3f  x    700  =  $2625 . 

In  other  words  the  monopolist  will  continue  to  find  his 
greatest  profits  in  continuing  to  charge  the  original  price,  $5. 
It  is  clear,  therefore,  that  cases  may  arise  in  which  it  will  be 
profitable  for  the  monopolist  to  bear  the  burden  himself.2 
No  part  of  the  tax  will  be  shifted  to  the  consumer. 

1  Professor  Edgeworth,  for  instance,  urges  this  criticism.     The  only  cases  in 
which  it  is  possible  for  the  monopolist  to  bear  the  whole  tax  himself,  says  he,  are 
(0  )  when  it  is  not  in  the  power  of  the  monopolist  to  increase  his  output,  and  (£) 
when  the  monopolist  is  the  sole  buyer.     Cf.  Economic  Journal,  vii,  p.  227.    That 
these  are  not  the  only  cases,  however,  is  clear  from  the  argument  in  the  text. 

2  Cournot  states  that  the  tax  must  always  be  shifted  (except  in  the  cases  men- 
tioned in  the  preceding  note).     Professor  Edgeworth  (Economic  Journal,  vii, 
p.  405)  thinks  that  this  is  true  "  in  general."     Later,  when  hard  pressed  by  Pro- 
fessor Graziani,  he  seeks  to  maintain  his  position  by  assuming  that  "  the  change 
of  price  is  small,"  "by  taking  A/   sufficiently  small"  (Economic  Journal,  viii, 
p.  235).     But  is  it  fair  to  assume  that  a  small  change  of  price  is  "  more  general " 
than  a  great  one?     And  would  Professor  Edgeworth's  elaborate  formulae  all  hold 
good,  if  the  change  of  price  were  substantial?     It  is  not  denied  that,  if  we  varied 
the  figures  in  the  text,  it  might  happen  that  when  the  cost  per  piece  were  2.\,  the 
price  which  yields  maximum  profit  might  become  greater  than  5.     What  it  is 
sought  to  prove  by  the  above  illustration  is  that  this  result  does  not  necessarily 
follow.     We  venture,  therefore,  still  to  cling  to  the  position  in  the  text,  notwith- 
standing that,  in  the  opinion  of  Professor  Edgeworth,  the  opposite  point  has  been 
"  proved  formally  and  mathematically  by  Cournot,  informally  and  in  plain  prose  " 
by  himself.     See  Economic  Journal,  vii,  p.  405,  note  I.     Knut  Wicksell,  on  the 


Taxes  on  Profits  277 

Granting,  however,  that  this  is  exceptional,  and  that  in 
ordinary  cases  the  monopolist  will  shift  at  least  a  part  of  the 
burden,  it  was  stated  above1  that  the  more  elastic  the  demand, 
the  smaller  the  proportion  of  the  tax  that  he  would  be  apt  to 
shift  to  the  consumer.  It  may  be  wise  to  illustrate  this  also 
by  some  simple  arithmetical  figures.2 

Demand  is  said  to  be  more  elastic  when  each  successive 
increase  of  price  leads  to  a  greater  falling  off  in  demand. 
The  example  above  was  based  on  the  assumption  that,  at  the 
price  of  $6,  the  demand  would  fall  to  700.  Let  us  now 
assume  that,  with  a  more  elastic  demand,  the  sales  at  price 
$6  would  fall  off  as  far  as  675  units;  and  let  us  further 
assume  that,  with  a  more  stable  demand,  the  sales  at  the  price 
$6  would  fall  off  only  to  725  units.  Now,  with  the  more 
elastic  demand,  the  net  profits  would  be,  after  the  tax  of  $i 
per  unit  was  imposed  (6  —  3)  x  675  =  $2025 ;  but  with  the 
less  elastic  or  more  stable  demand,  the  net  profits  would  be 
(6  —  3)  x  725  =  $2175.  Hence,  the  more  stable  the  demand, 
the  greater  the  chances  of  his  increasing  the  price  by  the 
whole  tax.3 

The  validity  of  this  statement  may  be  seen  from  a  reductio 

other  hand,  thinks  that,  theoretically,  the  monopolist  will  always  add  the  tax  to 
the  price,  but  that  practically  he  will  often  not  do  so.  —  Finanztheoretische  Unter- 
suchungen,  p.  12. 

1  See  p.  204. 

2  Especially  because  the  proposition  has  recently  been  assailed,  again  by  Pro- 
fessor Edgeworth,  in  Economic  Journal,  vii,  p.  227,  note  4,  and  in  his  criticism 
of  Professor  Graziani's  acceptance  of  the  above  contention  in  ibid.,  vii,  p.  406, 
and  viii,  pp.  237,  238.     For  Professor  Graziani's  rejoinder,  see  Sulla  Repercus- 
sione,  etc.,  pp.  6,  7. 

8  It  is  not  permissible  to  say  that,  if  this  were  true,  the  monopolist  would  have 
raised  the  price  before  the  imposition  of  the  tax.  For,  according  to  our  hypoth- 
esis, the  net  profits  at  the  original  price  of  $5  were  $3000;  and  with  a  sale  of 
725  units  at  the  price  of  $6  without  the  tax,  his  real  profits  would  still  be  only 
(6  —  2)  x  725  =  $2900.  It  is  only  when  the  elasticity  is  indefinitely  small  that 
such  a  result  would  follow.  As  Professor  Edgeworth  observes,  we  must  assume 
some  elasticity,  for  otherwise  equilibrium  would  not  have  been  reached.  The 
monopolist  would  have  gone  on  raising  prices  until  checked  by  a  sensible  elas- 
ticity. The  objection  urged  by  Knut  Wicksell,  Theoretische  Untersuchungen, 
p.  12,  is  therefore  not  well  taken. 


278          Shifting  and  Incidence  of  Taxation 

ad  absurdum  of  the  opposite.  Suppose  it  were  true  that,  the 
more  elastic  the  demand,  the  greater  the  chance  that  the 
monopolist  would  add  the  tax  to  the  price.  Then  it  would 
follow  that,  if  at  the  price  of  $6  the  demand  fell  off  to  500, 
the  net  profits  of  the  monopolist  would  be  (6  —  3)  x  500 
=  $1500;  if  to  400,  then  (6  —  3)  x  400=  $1200;  if  to  300, 
then  (6  —  3)  x  300  =  $900,  and  so  on.  In  other  words,  the 
monopolist  would,  in  each  case,  prefer  the  smaller  net  profits 
to  the  higher  ones — which  is  absurd.1 ,  It  remains  true, 
therefore,  that  the  degree  to  which  the  tax  will  be  added  to 
the  price  varies,  other  things  being  equal,  inversely  with  the 
elasticity  of  the  demand.  * 

We  see  then  that  the  validity  of  the  general  law  as  stated 
above  2  is  substantiated,  and  that  in  the  case  of  monopoly  the 
degree  to  which  the  price  will  be  increased  by  a  tax  depends 

(upon  the  height  of  the  tax  as  compared  on  the  one  hand 
with  the  ratio  of  product  to  cost,  and  on  the  other  hand  with 
the  elasticity  of  the  demand. 

If  we  consider  the  ulterior  effects  of  a  tax  on  the  gross 
product  of  a  monopoly,  some  interesting  conclusions  force 
themselves  on  our  attention.  Let  us  take  up  those  cases  in 
which  the  monopolist  will  generally  add  the  tax  to  the  price. 
To  this  extent  he  will  have  shifted  the  tax  to  the  consumer ; 
but  that  does  not  mean  that  he  suffers  no  loss.  On  the  con- 
trary, since  the  increased  price  means  reduced  sales,  the  net 
profits  of  the  monopolist  will,  as  we  have  seen,  be  smaller 
than  before  the  tax.  He  therefore  loses  also.  The  tax  he 
pays  to  the  government  is,  indeed,  smaller  than  it  would  have 
been  if  he  had  continued  to  produce  as  much  as  before ;  and 
in  this  sense  we  can  speak  of  a  partial  evasion  of  the  tax. 
That  is,  taking  the  figures  used  above  in  the  illustration  of 
normal  conditions,  the  tax  of  $i  per  unit  amounts  to  $1000 

1  The  error  of  Professor  Edgeworth  seems  to  consist  in  the  assumption  that 
the  demand  curve  is  continuous,  —  that,  if  an  increase  of  price  leads  to  such 
a  sudden  falling  off  in  demand,  a  decrease  of  price  will  lead  to  a  similar  jump  in 
demand.     But  this  does  not  necessarily,  or  even  ordinarily,  follow.     Cf.  the  con- 
siderations below,  p.  287. 

2  See  p.  273. 


Taxes  on  Profits  279 

when  1000  units  are  sold ;  but  since  the  change  of  price  from 
$5  to  $6  cuts  down  the  sales  to  only  700  units,  the  govern- 
ment then  receives  only  $700.  The  producer  thus  evades 
the  tax  to  the  extent  of  $300,  but  he  also  suffers  a  consider- 
able loss.  For,  while  his  net  profits  before  the  imposition  of 
the  tax  were  $3000,  his  net  profits,  after  he  raises  the  price 
by  the  entire  amount  of  the  tax,  are  only  $2100.  He  thus 
loses  $900,  although  he  technically  shifts  the  tax.  Moreover, 
the  consumers  also  lose.  Those  who  pay  the  increased  price 
can  measure  their  loss  in  dollars  and  cents  ;  for,  if  the  tax  is 
shifted  completely,  they  pay  the  total  amount  of  the  tax. 
Those  who  have  been  compelled,  by  the  increase  of  price,  to 
forego  the  article  and  to  content  themselves  with  something 
inferior,  also  suffer  a  loss,  even  though  it  cannot  be  definitely 
expressed.  The  only  persons  who  gain  are  the  producers  of 
the  new  commodity  which  some  of  the  consumers  now  sub- 
stitute for  the  old  one.  This  gain,  however,  which  also 
cannot  be  expressed  numerically,  will  ordinarily  be  smaller 
than  the  loss  suffered  by  the  producers  of  the  original  article. 
Even  though  a  tax  on  gross  product  be  shifted  to  the  con- 
sumer, in  the  sense  of  causing  a  rise  in  price,  it  is  apt  to 
inflict  a  loss  on  the  producer  as  well  as  on  the  consumer ;  and 
this  loss  to  both  classes  may  exceed  the  total  yield  of  the  tax 
to  the  government.  In  the  above  extreme  case  the  pro- 
ducers lose  $900,  the  consumers,  whose  loss  can  be  computed 
numerically,  lose  $700,  or  $1600  together,  while  the  tax 
yields  only  $700.  The  possible  dangers  of  taxes  on  gross 
product  are  thus  apparent.1 

1  The  above  reasoning  may  be  illustrated  graphically  as  well  as  arithmetically. 
Fleeming  Jenkin,  "  On  the  Principles  which  Regulate  the  Incidence  of  Taxes,"  in 
Proceedings  of  Royal  Society  of  Edinburgh,  Session  1871-1872,  p.  624  (republished 
in  Papers,  Literary,  Scientific,  etc.,  by  the  late  Fleeming  Jenkin,  edited  by  Colvin 
and  Ewing,  1887,  "»  P-  I1[3)>  made  use  of  the  diagram  on  the  next  page. 

FN  is  the  demand  curve,  PE  the  supply  curve,  CO  the  amount  of  tax  per 
unit.  Then  OM  is  the  market  price  to  the  supplier,  OMf  the  market  price  to  the 
buyer,  and  MM'  the  tax. 

The  amount  raised  by  the  tax  is  MCCM',  the  portion  paid  by  the  seller 
CC"M»M,  the  portion  paid  by  the  buyer  C''C'M'M".  The  whole  loss  to  the 
community  is  MCDC'M',  the  loss  to  the  sellers  CDM"M,  the  loss  to  the  buyers 


280 


Shifting  and  Incidence  of  Taxation 


The  case  of  a  bounty  is  just  the  reverse  of  a  tax.  It  can 
be  proved  in  the  same  way  that,  while  a  bounty  ordinarily 
benefits  only  the  producer  and  brings  no  advantage  to  the 
consumer,  cases  may  possibly  occur  where  the  result  of  a 
bounty  will  be  not  only  an  increase  of  the  profits  of  the 
producer,  but  also  a  decrease  of  the  cost  to  the  consumer. 
This  is  the  reason  why  bounties  have  generally  been  given ; 
namely,  to  educate  the  producer  to  that  point  where  he  may 
find  it  profitable  to  reduce  prices.  But  these  instances  are 
very  exceptional,  just  as  was  the  preceding  case  of  a  tax 
that  cost  the  producer  and  the  consumer  far  more  than  it 
yields  to  the  government.  Such  cases,  moreover,  cannot  be 
advanced  as  arguments  in  favor  of  the  policy  of  bounties  in 
general ;  for,  ordinarily,  the  loss  occasioned  to  the  taxpayers 
who  pay  in  taxes  the  amount  distributed  as  a  bounty  more 
than  outweighs  the  benefits  to  the  special  classes  who  are 

MUDC1W.  Both  buyers  and  sellers  suffer  a  loss  beyond  the  tax.  The  sellers 
suffer  a  loss  CC"D,  the  buyers  suffer  a  loss  C'O'D.  If  the  tax  is  large,  CO  will 
approach  the  axis  OX.  Then  the  tax  will  be  unproductive,  and  the  excess  of  loss 
to  buyers  and  sellers,  COD,  will  be  large. 


Of  course,  according  as  the  industry  obeys  the  law  of  constant  returns,  or  of 
increasing  returns,  the  supply  curve  PE  will  tend  to  curve  differently.  Conversely, 
according  to  the  elasticity  of  the  demand,  the  demand  curve  /Wwill  tend  to  be 
parallel  to  EO.  Jenkin  did  not  modify  his  diagram  to  meet  these  conditions. 
But  Professor  Marshall  has  made  the  changes  in  his  Principles  of  Economics, 
3d  ed.,  pp.  523-525,  to  which  the  reader  is  referred.  Marshall,  however,  applied 
his  diagrams  only  to  consumers'  rent,  i.e.  to  what  Jenkin  called  O  Cu D.  It  is 
equally  applicable  to  the  producers'  rent.  The  whole  analysis  is  outlined  by 
Cournot  in  his  Principes  Mathematiques,  pp.  78-82  (English  translation,  pp. 
71-75),  and  more  especially  in  his  Principes  de  la  Theorie  des  Richesses,  pp.  374- 
378.  But  so  far  as  concerns  the  laws  of  decreasing  and  increasing  cost,  the  reader 
is  reminded  of  the  discussion  above,  pp.  204-206. 


Taxes  on  Profits  281 

deemed  to  derive  a  benefit  from  the  bounty.  It  is  for  this 
reason  that  modern  governments  grant  bounties  only  in  the 
exceptional  instances  mentioned  above. 

Returning  now  to  the  consideration  of  taxes  on  gross  prod- 
uct in  general,  irrespective  of  the  fact  whether  the  industry 
is  subject  to  the  law  of  monopoly  or  of  competition,  attention 
must  be  called  to  a  point  in  which  many  have  committed  a 
serious  error.  Cournot,  for  instance,  maintained  that  a  tax, 
whether  on  a  monopoly  or  on  a  competitive  commodity,  may 
raise  the  price  to  an  extent  greater  than  the  amount  of  the 
tax.  /The  chief  reason  he  advanced  for  this  phenomenon 
was  that  the  price  paid  by  the  consumer  must  include  not 
only  the  tax  but  the  interest  on  the  sum  necessary  to  pay  the 
tax,  and  the  profits  of  the  middlemen.  The  necessary  con- 
clusion was  that  it  is  always  wiser  to  assess  the  tax  at  as 
late  a  stage  as  possible  —  that  is,  on  the  consumer  himself  — 
since  the  collection  of  the  tax  becomes  more  costly,  more 
vexatious,  and  more  burdensome  to  the  community  in  propor- 
tion as  the  assessment  of  the  tax  approaches  the  producers. 
The  consumers  will  have  to  pay  more  than  the  government 
receives.1 

This  theory  of  Cournot  is,  however,  nothing  but  the 
accepted  doctrine  of  Adam  Smith,  Ricardo  and  Mill. 
Adam  Smith  puts  the  idea  into  the  plainest  form  when  he 
says : — 

"  A  tax  upon  these  articles  (necessaries  of  life)  necessarily 
raises  their  price  somewhat  higher  than  the  amount  of  the 
tax,  because  the  dealer  who  advances  the  tax  must  generally 
get  it -back  with  a  profit.  His  employer,  if  he  is  a  manu- 
facturer, will  charge  upon  the  price  of  his  goods  this  rise 
of  wages,  together  with  a  profit;  so  that  the  final  payment 
of  the  tax,  together  with  this  exchange,  will  fall  upon  the 

1  Cournot  argues  on  p.  78  of  the  Principes  Mathematiques  (English  translation, 
p.  70)  that,  owing  to  the  "  additional  charges  arising  from  interest,"  "  the  com- 
modity will  be  sold  at  a  higher  price  just  in  proportion  as  the  tax  is  prematurely 
collected."  Cf.  the  corresponding  statement  in  his  Principes  de  la  Theorie  des 
Richesses,  p.  273,  as  to  competitive  conditions. 


282          Shifting  and  Incidence  of  Taxation 

consumer.  The  final  payment  of  both  the  one  and  the 
other  (taxes  on  necessaries  and  on  labor)  falls  altogether 
on  themselves  (the  consumers)  and  always  with  a  consider- 
able overcharge."  l 

So  also  this  is  what  Ricardo  means  when  he  says  that 
"  the  taxing  of  all  commodities  will  raise  the  price  by  a  sum 
at  least  equal  to  the  tax,"2 — a  remark  which,  as  we  have 
seen,  is  not  necessarily  true.  So  Du  Puynode,  Parieu  and 
many  other  writers  make  the  same  statement.^  Fawcett 
calls  this  the  most  serious  objection  against  taxes  on  com- 
modities.3 \y 

This  whole  theory  rests  on  the  old  doctrine  of  normal  or 
natural  profits.  As  soon  as  we  remember  that,  according  to 
the  modern  theory,  actual  profits  are  simply  the  surplus  over 
marginal  cost,  the  doctrine  falls  to  the  ground.  The  middle- 
man cannot  add  his  profits  to  the  price,  because  in  a  state  of 
competition  price  is  fixed  at  any  given  moment  at  the  cost  of 
the  most  expensive  increment.  If  there  were  such  a  thing 
as  normal  profits,  the  price  of  the  article  would  indeed  be 
increased  with  each  transfer,  until  the  ultimate  price  might 
immensely  exceed  the  tax.  But  there  is,  under  competitive 
conditions,  always  a  producer  or  middleman  on  the  margin  of 
production  —  that  is,  one  who  produces  or  handles  the  prod- 
uct without  profits,  simply  getting  back  his  expenses  — 
and  the  price  of  the  whole  supply,  at  any  given  moment,  is 
equal  to  his  cost  of  doing  the  business.  The  profits  are 

1  Wealth  of  Nations,  book  v,  chap,  ii  (Rogers'  ed.,  ii,  pp.  468-470). 

2  Principles  of  Political  Economy  and  Taxation,  chap,  xvii  (McCulloch's  ed., 
p.  1 86).     Cf.  Mill,  Principles,  book  v,  chap  iv,  §  2. 

8  Du  Puynode,  De  la  Monnaie,  du  Credit  et  de  VImpot,  ii,  p.  2IO;  Parieu, 
Traite  des  Impbts,  i,  p.  165;  Sayer,  The  Income  Tax,  1833,  pp.  58,  59;  Fawcett, 
Political  Economy,  pp.  550,  551  (6th  ed.).  The  most  recent  repetition  of  the 
statement  is  by  Sidney  and  Beatrice  Webb  in  their  Industrial  Democracy,  1898, 
P-  3°3-  "  At  every  '  repercussion '  of  the  tax,  there  would  be  an  additional '  load- 
ing,' so  that  the  ultimate  charge  to  the  consumer  would,  as  in  the  case  of  excise 
duties  on  raw  materials,  far  exceed  the  original  sum." 

The  theory  itself  may,  as  we  know,  be  traced  back  to  a  period  anterior  to 
Adam  Smith.  It  is  found  in  Fauquier,  in  Decker  and  in  other  writers  of  the 
time.  See  above,  pp.  17,  56. 


Taxes  on  Profits  283 

obtained  only  by  the  more  fortunate  or  more  skilful  indi- 
viduals. The  mere  fact  that  the  product  passes  through  a 
number  of  hands  cannot  in  itself  raise  the  price  by  more 
than  the  exact  cost  of  such  transference.  Cost,  however, 
does  not  include  profits;  cost  is  the  condition  of  profit. 
Otherwise  retail  prices  would  increase  geometrically,  accord- 
ing to  the  number  of  retailers  —  a  conclusion  which  is  obvi- 
ously untrue.  The  tax  is  simply  an  addition  to  the  cost  of 
production ;  and  there  can  be  no  geometrical  increase  in  the 
tax.  As  soon  as  we  abandon  the  normal  profits  theory,  then 
we  see  how  inaccurate  is  the  excess-of-price-above-tax  doc- 
trine. The  doctrine  assumes  not  only  that  the  producer  is  a 
monopolist,  but  that  every  middleman  is  a  monopolist  also. 
Only  on  this  assumption  can  there  be  no  no-profits  middle- 
man. The  assumption,  however,  is  not  practicable  in  treating 
conditions  of  actual  life.1 

There  is,  indeed,  one  way  in  which  the  price  of  an  article 
may  be  driven  up  beyond  the  amount  of  the  tax  —  a  way 
suggested  in  the  last  sentence,  but  involving  considerations 
very  different  from  those  just  discussed.  Since  a  tax  on 
production  or  on  commodities  must  generally  be  advanced 
before  the  producer  has  received  payment  for  his  sales,  the 
necessity  of  raising  the  funds  will  bear  more  heavily  on  the 
smaller  producers.  In  fact,  under  given  conditions  of  elas- 
ticity of  demand,  such  a  tax,  especially  if  it  be  high,  tends 
to  increase  the  advantages  of  the  powerful  producer.  When 
the  conditions  are  sufficiently  favorable,  the  imposition  of  a 
tax  may  thus  be  the  direct  cause  of  the  creation  of  monopoly. 
But  it  is  then  primarily  the  monopoly,  and  only  indirectly 
the  tax,  which  enables  the  producer  to  raise  the  price  far 
above  its  previous  level.  Conversely,  the  repeal  of  a  tax  may 
reduce  the  price  by  an  amount  far  greater  than  the  tax, 
because  what  was  formerly  a  monopoly  may  now  become 
subject  to  competition.  As  a  good  example  of  this  tendency 
may  be  mentioned  the  tax  on  matches  in  the  United  States 

1  Cf.  Gunton,  Principles  of  Social  Economics,  p.  380.  His  conclusions  are  in 
other  respects,  however,  questionable. 


284          Shifting  and  Incidence  of  Taxation 

during  the  Civil  War,  the  imposition  of  which  created  a 
monopoly  with  high  prices,  and  the  abolition  of  which  caused 
a  fall  in  price  considerably  greater  than  the  amount  of  the 
tax.  Again,  the  proposed  reduction  of  taxes  on. certain  com- 
modities —  for  example,  tobacco  —  was  opposed  in  the  United 
States  by  the  large  manufacturers  and  importers,  because 
the  higher  the  tax  the  greater  the  advantage  of  the  large 
dealer.  But  it  is  primarily  because  of  the  monopoly,  and 
only  indirectly  because  of  the  tax,  that  prices  are  thus  raised 
unduly.1 

The  whole  question  of  the  incidence  of  import  or  export 
duties  is  virtually  identical  with  the  one  discussed  in  the 
preceding  cases;  for  import  and  export  duties  are  usually 
levied  at  given  rates  per  units  of  the  commodities,  whether 
the  units  be  those  of  weight  or  of  value;  that  is,  whether 
the  rate  be  specific  or  ad  valorem.  It  will  be  readily  seen, 
therefore,  how  erroneous  is  the  doctrine  of  those  extremists 
who  maintain  that  the  loss  to  the  consumer  is  always  and 
necessarily  measured  by  the  proceeds  of  the  import  duties. 
On  the  contrary,  it  may  happen  that  prices  will  rise  by  some- 
thing less  than  the  tax ;  and  it  is  conceivable,  although  not 
probable,  that  prices  may  not  rise  at  all.  When,  for  example, 
the  foreign  producer  fears  that  the  increase  of  price  by  the 
total  amount  of  the  tax  will  so  materially  reduce  his  sales  as 
to  render  his  net  profits  lower  than  they  would  be  if  he 
assumed  a  part  of  the  tax  himself,  prices  may  rise  by  some- 
thing less  than  the  tax.  On  the  other  hand,  it  may  happen 
that  the  loss  to  the  consumer  will  be  more  than  the  amount 

1  There  is  another  case  in  which  a  tax  may  increase  the  price  of  a  commodity 
by  more  than  the  amount  of  the  tax.  This  is  the  case  where  a  smaller  tax  is 
imposed  on  the  producer  of  a  larger  quantity  of  units  than  on  the  producer  of  a 
smaller  quantity.  In  industrial  operations  in  general  such  a  tax  is  well-nigh 
unknown.  It  would  be  what  the  French  call  an  "  upside  down  progressive  tax." 
But  in  agriculture  it  has  happened  that  a  uniform  tax  is  imposed  per  acre,  while 
the  productivity  of  the  land  varies.  In  such  a  case,  the  tax  would  involve  a  lower 
rate,  per  bushel  of  wheat  for  instance,  on  the  more  productive  land  than  on  the 
less  fertile  land ;  and,  as  long  as  the  less  fertile  land  contributed  a  part  of  the 
necessary  supply,  the  price  of  the  product  would  rise  by  more  than  the  amount 
of  the  tax.  The  case  is  worked  out  arithmetically  above  on  p.  225. 


Taxes  on  Profits  285 

of  the  tax.  It  is  impossible  to  lay  down  any  exact  and  uni- 
versal rule;  attention  must  always  be  paid  to  the  given 
conditions  of  the  particular  case.  The  application  of  the 
principle  is  so  important,  however,  that  it  merits  a  fuller  dis- 
cussion, which  will  be  reserved  for  another  chapter.1 

2.    A   Tax  on  Gross  Receipts 

A  tax  on  gross  receipts  must  not  be  confounded  with  a  tax 
on  sales  (in  the  sense  of  a  tax  proportional  to  the  number  of 
commodities  sold)  or  with  a  tax  on  gross  product.  A  tax  on 
sales  or  on  product  varies  with  the  amount  sold  or  produced. 
But  gross  receipts  may  be  larger  with  small  sales  than  with 
large  sales,  provided  prices  are  higher.  Conversely,  gross 
receipts  may  be  smaller  with  large  sales  than  with  small 
sales,  provided  prices  are  lower. 

If  we  take  up  first  the  case  of  competition,  it  is  clear  that 
there  can  be  in  the  given  market  only  one  price — that  equiva- 
lent to  the  cost  of  production  of  the  dearest  increment  of  the 
temporary  supply.  Now  a  tax  on  gross  receipts  necessarily 
increases  the  expenses  of  this  dearest  increment ;  for  the  pro- 
ducer at  the  margin  of  profitable  production,  whose  gross 
receipts  afford  him  only  a  bare  return  for  his  outlay,  without 
any  profits,  must  add  the  tax  to  his  price,  if  he  is  to  remain 
as  a  competitor  at  all.  In  the  end,  therefore,  the  tax  must  be 
shifted.  The  extent,  however,  to  which  the  tax  will  be  shifted 
at  any  particular  time  will  depend  on  the  considerations  that 
were  discussed  in  the  case  of  a  tax  on  gross  product ;  that  is, 
on  the  elasticity  of  the  demand  as  compared  with  the  elas- 
ticity of  the  supply. 

In  the  case  of  monopoly  the  same  effects  are  also  generally 
observable.  Although  the  increase  of  price  will  lead  to  a  fall- 
ing off  in  the  demand,  and  although  the  gross  receipts  may 
even  be  less  than  before,  the  net  profits  of  the  monopolist  will 
generally  be  greater,  because  of  the  diminution  of  the  expenses 
due  to  the  decrease  of  the  output,  and  because  the  tax  on  the 

1  See  below,  pp.  300  et  seq. 


286          Shifting  and  Incidence  of  Taxation 

reduced  gross  receipts  will  be  less  than  it  would  have  been 
had  the  sales  remained  unchanged.1 

Although  it  is  generally  true  that  a  tax  on  monopoly  gross 
receipts  will  raise  prices,  the  conclusion  does  not  necessarily 
follow.2  Cases  may  arise  where  it  will  be  profitable  for  the 
monopolist  to  bear  the  burden  himself.  The  reasoning  as 
illustrated  by  the  diagram  in  the  note  assumes  that  the  falling 
off  of  demand  with  increase  of  price  is  not  only  continuous, 
but  absolutely  proportional,  and  that  therefore  the  demand 
curve  may  be  represented  by  a  straight  line.  But  it  is  pos- 

1  This  general  shifting  of  the  tax,  in  whole  or  in  part,  can  be  illustrated  by  a 
diagram. 

At  price  OT\et  OMbe  sold;  at  price  OF  let  6Wbe  sold. 

Let  gross  receipts  0  TCM  =  $10,000;  let  gross  receipts  O T' ON  =  $8990. 
(These  figures  are  chosen  because  they  were  the  ones  used  in  the  first  edition,  in 
the  illustration  which  is  discarded  here  for  the  reasons  mentioned  in  the  next 
note.) 

Let  PP  =  line  of  cost.  Let  cost  OPVM  —  $7000.  Let  cost  OPV'N=  $6000. 
Then  net  receipts  at  price  OT=  $10000  —  $7000  =  $3000.  Then  net  receipts  at 
price  07V  =  $8990  —  $6000  =  $2990.  The  monopolist,  then,  will  prefer  price  OT. 

Now  impose  a  tax  of  one  per  cent  on  gross  receipts.  With  gross  receipts 
$10,000,  tax  =  $100.  With  gross  receipts  $8990,  tax  =  $89.90.  Net  receipts 
$3000  —  $100  =  $2900;  net  receipts  $2990  —  $89.90  =  $2900.10.  The  monopo- 
list will  now  prefer  the  price  OT1. 

S 


N      M 


Hence,  after  the  imposition  of  a  tax  on  gross  receipts,  the  monopolist  will 
prefer  to  raise  the  price.  Here,  as  before,  however,  allowance  must  be  made 
for  the  elasticity  of  demand  and  for  the  ratio  of  product  to  cost. 

2  In  the  first  edition  of  this  work  the  statement  was  made  that  such  a  tax  could 
never  raise  price.  This  was  an  error,  due  to  inattention,  in  the  particular  illus- 


Taxes  on  Profits  287 

sible  that  the  demand  may  fall  off  largely  for  the  initial  incre- 
ments of  price,  and  less  largely  thereafter.  Let  us  utilize,  in 
other  words,  a  hypothesis  similar  to  the  one  already  men- 
tioned,1 where,  instead  of  the  demand  falling  off  by  100  units 
for  every  one-quarter  of  a  dollar  added  to  the  price,  the 
demand  at  price  $5  amounts  to  1000;  at  price  $5^,  to  900; 
at  price  $5^,  to  825  ;  at  price  $5f,  to  750;  and  at  price  $6,  to 
700.  If  a  tax  of  ten  per  cent  on  gross  receipts  be  now  im- 
posed, the  figures  will  be  as  follows :  — 

At  Price  Gross  receipts  io%tax 

$5       ....  5    x  $1000  =  $5000         $500 

5^    ....  Six     900=   4725         472.50 

51    ....  5|  x     825=   4537.50    453-75 

5f    .    .    .    .  sfx     750=   4312.50    431.25 

6      ....  6    x      700  =   4200          420 

The  expenses  will  be  the  cost  of  production  plus  the  tax,  or 

At  Price  Cost  of  production      plus  tax  equals  total  expenses 

$5      .      .      .      2  X  $1000  =  $2000  +  $500  =  $2500 

5i  .    .    .    2x     900=   18004-   472.50     =   2272.50 

Si  .   .   .   2  X    825  =  1650  +  453.75    =  2103.75 

5f.    .    .    2x     750=    1500+  431.25     =    1931.25 
6  .    .    .    2  x     700  =    1400  +  420          =    1820 

Deducting  from  gross  receipts  the  total  expenses,  we  have 
the  net  profits :  — 

At  Price  Gross  receipts  minus  expenses  equal  net  profits 

$5  ..- 
Si-  •  • 
5i-  «  • 
5f  .  .  . 
6  ... 

tration,  to  the  fact  that  cost  changes  with  the  amount  produced.  The  error  in 
the  original  calculation  has  been  pointed  out  by  several  writers,  for  example,  by 
Professor  Ross  in  the  Annals  of  the  American  Academy  of  Political  and  Social 
Science,  iii,  p.  460;  by  Knut  Wicksell  in  his  Finanztheoretiscke  Untersuchungen, 
p.  14;  by  Professor  Loria  in  his  review  of  the  work  of  Professor  Graziani  (who 
had  accepted  the  argument  of  the  first  edition)  in  the  Giornale  degli  Economisti, 
anno  vii,  p.  461  ;  and  finally  by  Professor  Edgeworth  in  the  Economic  Journal, 
vii,  p.  228.  But  some  of  them,  like  the  writer  last  named,  go  too  far  in  asserting 
that  a  tax  on  monopoly  gross  receipts  must  raise  prices. 
1  Above,  pp.  275,  276. 


$5000 

-  $2500  • 

=  $2500 

4725 

-  2272.50 

=  2452.50 

4537.50 
4312.50 

4200 

-  2103.75 
-  1931.25 
-  1820 

=  2433.75 
=  2381.25 
=  2380 

288          Shifting  and  Incidence  of  Taxation 

That  is,  the  maximum  monopoly  revenue  will  as  before  still 
be  at  price  $5. 

It  is,  therefore,  possible,  in  the  case  of  a  tax  on  gross 
receipts  as  well  as  in  the  case  of  a  tax  on  each  article  sold, 
that  the  monopolist  may  prefer  not  to  raise  the  price  at  all. 
Even  if  the  price,  however,  is  increased  by  reason  of  the  tax, 
as  will  ordinarily  be  the  case,  the  same  distinction  must  be 
observed  as  that  mentioned  in  the  previous  case  of  the  taxa- 
tion of  gross  product.1  That  is,  since  the  great  mass  of 
monopolies  are  subject  to  the  law  of  increasing  returns,  while 
the  great  mass  of  competitive  industries  obey  the  law  of 
decreasing  returns,  and  since  the  action  of  the  law  of  increas- 
ing returns  is  to  bring  about  a  slighter  degree  of  shifting  in 
the  case  of  monopoly  than  in  that  of  competition,  it  follows 
that  even  if  a  tax  on  gross  receipts  induces  the  monopolist 
to  raise  the  price  by  a  part  of  the  tax,  the  tendency  will  be 
for  the  producer  to  bear  more  of  the  burden  himself  than 
would  have  been  the  case  had  he  been  subject  to  competitive 
conditions. 

3.   A   Tax  on  Net  Receipts  or  Profits 

In  the  case  of  a  tax  on  the  net  profits  of  a  monopolist,  it 
might  be  assumed  that  the  tax  will  always  be  shifted  to  the 
consumer  because  of  his  necessary  dependence  on  the  mo- 
nopolist. This  assumption,  however,  would  be  completely 
false.  It  makes  no  difference  whether  the  monopolized 
commodity  is  one,  the  supply  of  which  is  strictly  limited 
and  which  is  not  reproducible  at  all,  or  whether  the  com- 
modity is  reproducible  according  to  the  law  of  constant, 
diminishing  or  increasing  returns.  So  far  as  the  producer 
is  concerned,  he  cannot  add  the  tax  to  the  price ;  for  it  may 
be  assumed  that  the  monopolist  producer  will  always  demand 
the  highest  price  which  the  consumer  is  willing  to  give.  If 
the  consumers  were  willing  to  pay  more,  he  would  have 
increased  the  price  before  the  imposition  of  the  tax.  /In 

1  See  above,  page  274. 


Taxes  on  Profits  289 

other  words,  since  monopoly  price  is  always  at  the  point 
of  greatest  monopoly  profits,  a  tax  on  these  profits  can  never 
\j  increase  the  price.  A  tax  on  monopoly  profits  must,  there- 
fore, fall  wholly  on  the  monopolist. 

In  the  case  of  competitive  net  receipts,  we  must  distin- 
guish between  an  exclusive  and  a  general  tax  on  profits. 
A  tax  on  the  profits  of  some  particular  occupation  must,  in 
the  long  run,  be  shifted  to  the  consumer,  provided  that  the 
commodity  continue  to  be  produced  at  all.  For  if  the  tax 
rests  on  the  particular  profits,  the  producers  will  be  put  at 
a  disadvantage  as  compared  with  those  engaged  in  other 
industries.  There  will  be  a  gradual  migration  of  capital  to 
find  the  most  profitable  level,  and  the  original  industry  will 
gradually  be  deserted.  In  the  long  run,  therefore,  either  the 
tax  will  be  shifted  to  the  consumer  or  it  will  lead  to  a  ces- 
sation of  production.  In  the  one  case,  consumers  suffer 
through  increase  of  price;  in  the  other  case,  they  suffer 
through  destruction  of  consumption.  But  in  no  case  will 
the  burden  ultimately  rest  on  the  permanent  producer. 

We  must,  however,  not  forget  the  following  important 
practical  point,  which  seems  to  have  been  overlooked  by 
many.  To  the  extent  that  the  theory  of  the  mobility  of 
capital  is  not  applicable,  "the  long  run"  will  not  occur. 
When  the  fixed  capital  forms  a  large  part,  and  the  circulat- 
ing capital  a  small  part,  of  the  entire  investment,  final  equi- 
librium can  be  brought  about  only  through  the  ruin  and 
disappearance  of  the  producer.  Even  where  the  capital  is 
ultimately  transferred,  the  intermediate  effects  are  often  the 
most  important  ones.  What  may  be  in  a  sense  unimportant 
from  the  standpoint  of  national  economy,  may  be  supremely 
important  from  the  standpoint  of  individual  economy.  When 
we  say  that  taxes  cannot,  in  the  long  run,  remain  on  the 
producer,  we  generalize  the  conception.  The  producer 
merely  represents  a  class  of  individuals  who  never  dis- 
appear. But  when  we  speak  of  the  producers  during  any 
interval,  we  refer  to  certain  individuals.  The  welfare  of 
producers  as  a  class  is  something  very  different  from  the 


290          Shifting  and  Incidence  of  Taxation 

welfare  of  an  actual  producer.  Producers  as  a  class  ulti- 
mately may  contrive  to  obtain  certain  average  returns ;  but 
this  may  be  rendered  possible  only  by  the  complete  ruin  of 
the  individuals  who  are  now  engaged  in  production.  So  far 
as  inequalities  of  taxation  are  not  constant  inequalities,  this 
process  will  continually  repeat  itself.  The  optimistic  theory 
is  as  much  out  of  place  here  as  it  is  in  the  other  domains  of 
economic  science.1  In  other  words,  even  an  exclusive  tax  on 
profits  may  at  any  given  time,  under  certain  conditions,  rest 
on  the  original  taxpayer  until  he  has  been  entirely  driven 
out  of  the  field.  The  only  result  of  a  tax  on  profits  might 
then  be  completely  to  stop  the  production  of  the  commodity 
or  the  continuance  of  the  business.  The  consumer  would 
then  suffer  not  through  the  increase  of  price,  but  through 
the  inability  to  procure  the  commodity  at  all. 
.  A  general  or  universal  tax  on  profits,  in  the  sense  of  a 
uniform  tax  on  profits,  does  not,  strictly  speaking,  exist  any 
more  than  a  general  or  uniform  tax  on  all  capital.2  But  a 

1  Cf.  above,  p.  230,  the  discussion  of  the  incidence  of  the  tax  on  the  net  profits 
of  land.    The  qualification  to  the  general  doctrine  as  to  the  incidence  of  exclusive 
taxes  is  admirably  expressed  by  Cliffe-Leslie  in  the  following  passage  :  "  Another 
incidence  of  a  number  of  taxes  on  the  working  classes  as  producers  has  been  con- 
cealed by  the  doctrine  that  taxes  on  particular  commodities  and  particular  employ- 
ments fall  on  consumers  only,  not  on  producers.     The  theory  of  taxation  abounds 
in  examples  of  the  danger  of  the  abstract  and  hypothetical  method  of  reasoning 
in  economics.    The  economist  sets  out  with  an  assumption  surrounded  with  con- 
ditions and  qualifications,  and  perhaps  itself  open  to  question,  such  as  that  in  the 
long  run,  and  on  the  average,  the  profits  of  different  occupations  tend  to  equality, 
and  presently  forgetting  all  his  qualifications  and  conditions,  concludes  that  the 
profits  of  individuals  must  be  equal;   and  therefore  all  special  taxes  advanced  by 
producers  must  come  back  to  them  with  equal  or  average  profit.     Individual 
profits  really,  in  almost  every  business,  vary  from  enormous  gain  to  absolute  loss. 
Mill  says :  '  That  equal  capitals  give  equal  profits,  as  a  general  maxim  of  trade, 
would  be  as  false  as  that  equal  age  and  size  give  equal  bodily  strength.'     Never- 
theless it  is  taken  for  granted  that  every  special  tax  on  a  business  is  received  '  with 
average  profit,'  though  the  net  result  of  all  a  trader's  advances  is  not  unfrequently 
ruin;   though  all  such  taxes  give  an  advantage  to  the  larger  capitalists.  .  .  ."  — 
"  The  Incidence  of  Imperial  and  Local  Taxation  on  the  Working  Classes."     In 
Essays  on  Moral  and  Political  Philosophy,,  1879,  p.  196.     In  the  2d  ed.,  under 
the  title  Essays  in  Political  Economy,  this  passage  is  found  on  pp.  388,  389. 

2  See  above,  p.  262. 


Taxes  on  Profits  291 

tax  may  practically  affect  so  many  classes  of  producers  in 
a  given  community,  and  so  many  different  kinds  of  profits 
more  or  less  removed  from  liability  to  competition  from 
foreign  sources,  that  we  are  justified  in  setting  up  the  con- 
ception of  a  general  tax,  in  contrast  with  an  exclusive  tax,  on 
profits.  Such  a  general  tax  on  net  profits  can  never  be  ^ ' 
shifted.  If  profits  represent  the  surplus  above  cost  of  pro- 
duction, a  general  tax  on  this  surplus  cannot  influence  the 
cost  of  production.  Price  cannot  be  altered,  and  the  inter- 
ests of  the  consumer  cannot  be  affected.  It  is  the  producer 
who  bears  the  tax,  both  immediately  and  ultimately. 

Some  writers,  indeed,  like  Cournot,  have  asserted  that 
the  ultimate  effects  on  the  consumer  may  be  bad,  because 
the  tax  restricts  the  producers'  consumption,  and  because  the 
employment  of  the  proceeds  of  the  tax  is  generally  less 
profitable  than  if  the  proceeds  had  remained  in  the  hands 
of  the  producer.  But  this  reasoning  seems  to  be  defective. 
It  takes  for  granted  that  taxes  are  used  unproductively,  and 
it  leads  logically  to  the  aphorism  of  Say  that  the  best  taxa- 
tion is  that  which  is  least  in  amount.  So  far  as  govern-  y 
mental  expenditures  are  necessary  and  judicious,  they  are 
useful  and  productive ;  and  it  is  not  permissible  to  assume 
that  private  expenditure  is  more  beneficial  than  public  expen- 
diture. Everything  depends  on  the  nature  of  the  expendi- 
ture, and  on  the  general  views  as  to  the  duty  and  limits  of 
governmental  activity.  To  say  that  a  tax  on  profits  is  injuri-  ; 
ous  to  the  consumer  seems  to  involve  a  begging  of  the  ques-  \ 
tion.  The  whole  problem,  moreover,  is  not  peculiar  to  a 
tax  on  profits,  nor  is  it  any  longer  a  problem  of  incidence : 
it  belongs  properly  to  the  wider  discussion  of  the  general 
influence  of  taxation. 

One  practical  inference  from  the  above  discussion  may  be 
used  in  connection  with  the  controversy  in  the  United  States 
as  to  whether  corporation  taxes  should  be  levied  on  gross  or 
on  net  receipts.  Whether  these  be  monopolies  or  not,  the 
a  priori  conclusion  in  favor  of  taxation  of  net  receipts l  is  fr^ 

1  See  Seligman,  Essays  in  Taxation,  pp.  198-205. 


292          Shifting  and  Incidence  of  Taxation 

strengthened  by  the  results  of  this  discussion.  In  the  par- 
ticular case  of  transportation  companies,  for  example,  around 
which  most  of  the  wordy  warfare  and  the  practical  contest 
have  waged,  it  is  more  likely  that  the  travellers  and  shippers 
will  feel  a  tax  on  gross  receipts  than  one  on  net  receipts. 


4.    A    Tax  of  Fixed  Amount 

It  may  happen  that  a  tax  is  not  assessed  according  to  net 
profits,  gross  receipts  or  sales,  but  that  it  is  imposed  in  the 
shape  of  a  lump  sum  on  all  the  producers  in  the  industry. 
This  is  the  common,  although  not  the  universal,  rule  with 
the  American  license  taxes.  No  matter  how  large  the  profits, 
the  tax  remains  the  same. 

In  the  case  of  a  monopoly,  such  a  tax  necessarily  falls  on 
the  monopoly  profits.  For  the  very  same  reasons  that  were 
advanced  above,  in  the  discussion  of  a  tax  on  monopoly 
net  receipts,  the  tax  cannot  be  shifted.  It  is  always  the 
monopoly  revenue  that  suffers. 

In  the  case  of  competition,  the  tax  of  fixed  amount  is  a 
condition  precedent  to  production.  It  might  be  inferred  that 
the  tax  would  therefore  be  an  addition  to  the  necessary  cost 
of  production,  which  must  be  shifted  to  the  consumer.  But 
this  is  not  the  case ;  for  such  a  tax  is  even  more  inimical  to 
the  small  producer  than  a  tax  on  gross  product.  As  the 
large  producer  will  pay  absolutely  no  more  than  his  small 
competitor,  he  will  prefer,  provided  the  commodities  are 
reproducible  to  any  extent,  to  assume  the  tax  and  to  recoup 
himself  by  capturing  the  customers  of  the  smaller  dealer. 
The  minor  producer  who  is  thus  unable  to  add  the  tax  to 
the  price  will  be  crowded  out  of  existence.  Thus  the  fixed 
license  tax,  when  high  enough  to  tempt  the  large  dealer, 
tends  to  be  borne  by  the  producer  —  until,  indeed,  the  grad- 
ual trend  toward  monopoly,  fostered  by  the  tax,  may  bring 
about  a  rise  of  price  and  thus  affect  the  interests  of  the 
customer.  Here  again,  however,  it  would.be  only  indirectly 
the  tax  that  would  cause  the  rise  of  price.  But  it  may 


Taxes  on  Profits  293 

frequently  happen  that  the  price  will  not  rise  at  all,  the  in- 
creased sales  of  the  fewer  producers  compensating  them  for 
the  tax  which  they  pay.  In  such  a  case,  the  incidence  of  the 
tax  may  in  a  certain  sense  be  declared  to  be  neither  on  the 
consumers  nor  on  the  producers  who  continue  to  produce 
permanently  after  the  imposition  of  the  tax ;  for  the  whole 
tax  may  be  discounted  and  borne  by  the  unfortunate  pro- 
ducers who  are  crowded  out  of  existence.  Thus  the  system 
of  high  liquor  licenses  does  not  necessarily  result  in  any 
increased  price  to  the  consumer.  Its  effect  may  be  a  dimi- 
nution of  the  saloons  and  the  gradual  monopolization  of  the 
trade  in  the  hands  of  the  wealthier  individuals.  The  pro- 
ducer then  always  pays  this  tax ;  the  consumer  may  or  may 
not  be  affected  ultimately. 

Of  course,  when  the  so-called  "license  taxes  "  are  not  fixed 
in  amount,  but  vary  with  gross  receipts  or  gross  produce  or 
net  profits,  their  incidence  is  governed  by  the  rules  laid  down 
in  the  preceding  paragraphs.  The  word  "  license  "  covers  a 
multitude  of  very  distinct  taxes. 

In  summing  up  the  preceding  discussion,  we  come  to  the 
following  conclusions:  the  incidence  of  a  tax  on  monopoly 
revenue  is  always  on  the  producer,  except  in  the  case  where 
the  tax  is  proportioned  to  the  amount  produced  or  soldi  in 
which  case  the  tax  is  ordinarily  shifted  in  whole  or  in  part, 
although  even  there,  under  certain  conditions,  the  tax  may  re- 
main on  the  monopolist  producer ;  a  general  tax  on  competi- 
tive profits,  whether  fixed  or  proportional  to  net  receipts,  rests 
on  the  producer;  a  special  tax  on  competitive  net  receipts 
is  ordinarily  shifted  to  the  consumer;  and  a  roundabout 
tax  on  competitive  profits,  in  the  shape  of  a  tax  on  gross 
receipts  or  gross  produce,  may  or  may  not  be  shifted  to  the 
consumer  —  with  the  probability  that,  in  the  great  majority 
of  cases,  the  whole,  or  almost  the  whole,  of  the  tax  will  be  so 
shifted. 

This  conclusion  may  not  be  satisfactory  to  the  sticklers  for 
over-precision  or  for  "  natural  laws  "  of  incidence.  But  it 


294          Shifting  and  Incidence  of  Taxation 

will  be  sufficient  to  show  the  delicacy  of  the  problem,  and  to 
prove  how  superficial  is  the  optimistic  or  general  diffusion 
theory. 

If  we  wish  to  draw  any  inferences  as  to  some  existing 
problems  in  the  United  States,  they  may  be  summarized  as 
follows :  — 

(1)  The  so-called  "business"  taxes   are  not  necessarily 
any  more  "  direct "  taxes  than  are  the  national  internal  reve- 
nue taxes. 

(2)  Taxes  on  pure  monopolies  should  not  be  levied  on 
gross  product  or  on  gross  receipts  if  it  is  desired  that  they 
should  remain  on  the  monopoly. 

(3)  Taxes  on  corporations  should  be  levied  on  net  receipts 
rather  than  on  gross  receipts  or  on  other  elements,  if  it  is  not 
intended  that  the  taxes  should  be  shifted  to  the  community. 

(4)  Business    taxes    in    general,    including    the    so-called 
license  taxes,  should  be  levied  according  to  net  receipts. 
The  so-called  license  taxes,  when  of  fixed  amount,  further 
the  trend  toward  monopoly ;  and  when  graduated  according 
to  sales  tend  to  be  shifted  to  the  consumer. 

(5)  Excise  or  internal  revenue  taxes,  when  levied  on  gross 
product,  are  apt  to  be  shifted  to  the  consumer.    But  the  degree 
to  which  they  will  be  shifted  depends  chiefly  on  three  points : 
(a)  whether  the  business  is  of  a  monopolistic  or  of  a  competi- 
tive nature ;  (b)  whether  the  elasticity  of  demand  is  great  or 
small ;  and  (c)  whether  the  relation  of  product  to  cost  is  con- 
stant or  not.     There  is  always  a  possibility  that  a  portion  of 
the  tax  may  rest  on  the  producer. 

The  application  of  the  general  principles  of  the  taxation  of 
profits  to  land,  houses,  debts  and  mortgages  has  already  been 
made  in  preceding  chapters,  and  needs  no  further  discussion. 


CHAPTER  VI 

TAXES  ON  WAGES 

IT  has  been  customary,  since  the  time  of  Adam  Smith,  to 
make  a  distinction  between  the  wages  of  ordinary  labor  and 
what  he  calls  "  the  recompense  of  ingenious  artists  and  men 
of  liberal  professions."  Let  us,  then,  first  take  up  the  inci- 
dence of  a  tax  on  the  latter  class. 

Adam  Smith  maintained  that  a  tax  on  such  skilled  employ- 
ments would  be  shifted,  because  this  recompense  "necessarily 
keeps  a  certain  proportion  to  the  emoluments  of  inferior 
trades." l  Unless  their  recompense  increased  by  the  amount 
of  the  tax,  these  professions,  "being  no  longer  on  a  level 
with  other  trades,  would  be  so  much  deserted  that  they  would 
soon  return  to  that  level."  On  the  other  hand,  John  Stuart 
Mill  maintained  that  all  the  skilled  and  privileged  employ- 
ments are  taken  out  of  the  sphere  of  competition  by  a  natural 
or  conferred  monopoly,  and  that  a  tax  will  always  fall  on 
them,  because  they  have  no  means  of  relieving  themselves  at 
the  expense  of  any  other  class.2  Which  of  these  two  state- 
ments is  correct  ? 

It  would  seem  that  in  the  main  Mill  is  right,  although  his 
reasons  are  not  entirely  above  criticism.  It  is  true  that  the 
earnings  of  professionals  are  in  general  regulated  by  custom 
rather  than  by  competition.  For  a  large  class,  moreover,  the 
superior  earnings  must  be  regarded  in  the  light  of  what  Mar- 
shall terms  quasi-rents.  A  great  tenor,  an  eminent  surgeon 
or  a  famous  lawyer,  for  example,  will  not  receive  more  for 
their  services,  if  a  tax  be  imposed  on  the  class  to  which  they 
belong.  To  them  a  tax  simply  means  a  burden  which  cannot 

1  Cf.  above,  p.  115.  2  Mill,  Principles,  book  v,  chap,  iii,  §  4. 

295 


\ 


296          Shifting  and  Incidence  of  Taxation 

be  shifted.  If  the  tax  had  not  been  imposed,  their  earnings 
would  have  been  the  same.  Moreover,  the  whole  class  of 
professional  workers  is  in  many  respects  subject  to  influences 
of  a  more  or  less  uneconomic  kind.  Their  motives  are  fre- 
quently not  pecuniary,  but  rather  of  a  higher  nature.  An 
actor,  a  painter,  a  doctor,  a  lawyer,  often  adopts  his  profes- 
sion with  other  objects  in  view  than  simply  making  his  living 
or  obtaining  the  greatest  possible  income.  It  is  not  long 
since  the  recompense  to  certain  professional  classes,  like 
doctors,  was  regarded  as  a  gratuity,  not  as  a  legally  enforce- 
able due.  Even  if  we  regard  these  classes  from  the  purely 
economic  standpoint,  we  cannot  say  that  their  recompense 
bears  any  necessary  proportion  to  common  wages.  The 
earnings  of  the  liberal  professions  are  not  dependent  on  cost 
of  production.  It  is  only  by  a  perversion  of  words  and  of 
facts  that  we  can  consider  the  time  and  efforts  spent  in 
educating  a  member  of  a  profession  as  a  capital  which  must 
earn  interest.  In  fact,  the  present  alleged  overfilling  of  the 
professions  is  due  not  so  much  to  the  hope  of  greater  earn- 
ings as  to  the  compulsory  education  and  general  social  condi- 
tions of  modern  times.  The  forces  which  keep  the  price  of 
labor  in  general  at  a  certain  level  do  not  operate  with  equal 
effect  in  this  field.  The  price  of  labor  in  professional  occu- 
pations, in  short,  is  not  competitive,  but  is  either  customary 
or  monopolistic.  v 

Salaried  public  officials  belong  to  a  similar  category ;  for 
governmental  salaries  depend  primarily  on  the  relative  desir- 
ability of  governmental  service,  and  on  considerations  of 
imagined  political  expediency.  They  may  be  highest  in 
countries  where  the  usual  level  of  wages  is  lowest.  Even  if 
this  were  not  so,  it  would  be  hard  to  say  on  whom  a  tax  on 
official  salaries  could  be  shifted.  Surely  not  on  the  govern- 
ment, because  it  does  not  enter  the  market  as  a  producer; 
nor  does  it  follow  ordinary  commercial  principles.  If  the 
tax  be  sufficiently  high  to  render  the  position  undesirable,  it 
may  result  in  less  efficient,  and  therefore  in  the  long  run 
more  expensive,  work.  The  community  at  large  will  suffer 


Taxes  on   Wages  297 

from  a  poor  civil  service.  But  the  tax,  as  such,  cannot  be 
shifted. 

When,  however,  we  come  to  the  ordinary  wages  of  the 
common  artisan,  whether  skilled  or  unskilled,  the  matter  is 
not  so  simple.  We  have  seen  that  the  older  theory  main- 
tains that  a  direct  tax  on  wages  falls  on  profits,  because 
wages  are  necessarily  fixed  by  the  cost  of  living,  or  the 
standard  of  life.  But,  in  the  course  of  our  sketch  of  the 
history  of  the  doctrine,  we  learned  some  of  the  objections 
made  to  this  theory.  These  may  be  summed  up  as 
follows :  — 

(i)  It  is  assumed  that  laborers  will  not  consent  to  accept  a 
reduction  in  their  standard  of  life.  This,  however,  is  largely  a 
question  of  power  between  the  wage-earner  and  the  employer. 
It  is  impossible  to  say  in  advance  who  will  win.  If  wages 
were  actually  fixed  by  the  bare  minimum  of  subsistence, 
then,  indeed,  a  tax  on  wages  would  necessarily  be  shifted. 
Although  Ricardo  was  not,  properly  speaking,  a  believer  in 
the  iron  law  of  wages,  he  makes  use  of  this  very  argument 
to  prove  his  point.  The  fact  is  that  wages  are  never  at  this 
point  of  bare  subsistence:  the  standard  of  life  is  always 
above  this  limit.  Between  this  limit  and  the  actual  standard 
of  wages  there  is  a  margin  on  which  a  tax  may  encroach. 
An  irruption  of  low-priced  immigrants,  other  things  being 
equal,  will  inevitably  lower  the  standard  of  life  and  the 
general  rate  of  wages.  So  also  a  tax  on  wages  which  will, 
at  first  at  all  events,  fall  on  the  laborer,  may  equally  well 
lower  his  standard  of  life,  by  making  it  impossible  for  him 
to  procure  the  conveniences  to  which  he  has  been  accustomed. 
The  wage-earner  will,  of  course,  strive  to  reimburse  himself 
by  demanding  higher  wages ;  but  there  is  no  reason  why  the 
employer  should  be  compelled  to  acquiesce.  If  that  were 
true,  no  reduction  of  wages  would  ever  be  possible,  because 
a  reduction  of  wages  always  implies  a  lowering  of  the  stand- 
ard  of  life.  Whether  or  not  a  tax  on  wages  will  be  shifted 
on  profits,  even  in  the  long  run,  depends  entirely  on  the 
relative  strength  of  the  labor  organizations  and  on  other 


298          Shifting  and  Incidence  of  Taxation 


itions    which    may    compel    the    employer    to    pay   an    / 
ase   of  waes   equivalent  to   the   amount   of   the   tax.  ^ 


conditions 

increase   of  wages   equivalent 

Whenever  such  conditions  are  not  present  —  and  they  are 

frequently  absent  —  the   tax  will   rest   on  the  wage-earner, 

and  trench  on  the  margin  above  the  bare  rate  of  subsistence, 

thus  keeping  down  the  standard  of  life. 

(2)  Even  granting  that  a  tax  on  wages  may  in  the  long 
run,  under  favorable  conditions,  be  shifted  to  profits,  in  the 
interval  the  burden  will  be  borne  by  the  laborer.  It  is  a  well- 
known  fact  that  in  a  general  rise  of  prices  the  price  of  labor 
is  always  the  last  to  respond  to  the  general  impulse.  This 
interval,  however,  may  become  more  or  less  permanent.  The 
longer  the  delay,  the  more  severe  is  the  suffering  that 
ensues,  and  the  greater  the  prospect  that  the  temporary 
diminution  of  the  consumers'  effective  demand  will  be  con- 
verted into  a  reduction  of  the  laborers'  standard  of  life. 

The  taxation  of  labor  results  in  a  vicious  circle.  The 
weaker  the  workman,  or  the  lower  his  general  standard  of 
life,  the  less  able  is  he  to  resist  the  attempts  of  the  employers 
to  reduce  his  wages  to  the  barest  minimum.  The  higher  his 
wages,  the  more  effective  is  his  power  of  resistance  and  com- 
pulsion, and  the  more  likely  is  he  to  secure  a  gradual  con- 
tinual advance  of  wages.  The  imposition  of  a  tax  on  wages 
thus  injures  the  workman  both  temporarily  and  permanently. 
It  reduces  his  standard  of  life,  and,  in  weakening  him,  it 
renders  less  easy  any  future  attempt  to  lift  himself  out  of 
his  impoverished  condition.v  If  a  tax  on  wages  is  shifted  to 
profits  at  all,  it  is  only  after  a  long  and  fierce  struggle,  during 
which  the  laborer  may  suffer  materially,  and  as  a  result  of 
which  his  whole  morale  may  be  lowered.  Here  again  there 
is  no  place  for  either  optimism  or  absolutism  of  theory. 


CHAPTER  VII 
OTHER  TAXES 

THE  application  of  the  principles  which  govern  the  inci- 
dence of  taxation  to  the  other  taxes  that  have  not  yet  been 
treated  calls  for  but  little  discussion.  The  most  important 
of  the  remaining  taxes  are  as  follows:  — 

I.   Poll  Taxes 

A  poll  or  capitation  tax  is  clearly  not  susceptible  of  being 
shifted,  except  to  the  extent  that  it  falls  on  the  laborer. 
Even  then,  it  must  trench  upon  the  margin  between  the 
cost  of  subsistence  and  his  actual  standard  of  life  before 
the  conditions  under  which  the  shifting  may  take  place  will 
be  present.  The  possibility  of  shifting,  moreover,  as  has 
already  been  indicated,  is  not  by  any  means  the  same  thing 
as  the  actual  shifting  itself. 

2.   Inheritance  Taxes 

A  tax  on  inheritances  or  bequests  cannot  be  shifted,  for 
evidently  there  is  no  one  to  whom  it  could  be  transferred. 
The  ulterior  effects  of  which  some  writers  speak,  such  as  the 
influence  of  inheritance  taxes  on  the  accumulation  of  capital, 
do  not  really  illustrate  the  process  of  shifting.  They  are, 
moreover,  of  such  doubtful  validity  that  they  may  be 
neglected.1 

1  Professor  Bastable  {Public  Finance,  2d  ed.,  p.  563),  for  example,  bases  his 
criticism  on  Ricardo's  view  that  such  taxes  fall  on  capital,  and  thinks  that  the 
whole  society  will  as  a  result  suffer  from  less  efficient  production.  For  a  criticism 
of  this  position,  see  West,  The  Inheritance  Tax,  1895,  PP- 

299 


300          Shifting  and  Incidence  of  Taxation 


3.   Excises 

An  excise  or  internal  revenue  tax  may  or  may  not  be 
shifted.  It  is  virtually  one  form  of  the  profits  tax  discussed 
above.  The  problem  depends  for  its  solution  on  the  con- 
sideration of  all  the  complicated  points  referred  to  there.1 
It  may  be  said,  however,  that  in  the  majority  of  cases  such 
a  tax  tends  to  be  shifted  in  whole  or  in  greater  part. 

Much  the  same  may  be  said  of  an  import  duty.  As  a 
general  rule,  this  tax  will  be  partially  or  completely  shifted ; 
but  the  exact  result  will  depend  on  the  particular  conditions 
of  the  individual  cases  in  question.  The  application  of  the 
general  principles  of  incidence  to  customs  duties  is  so  impor- 
tant as  to  warrant  a  somewhat  more  extended  discussion. 


4.   Import  and  Export  Duties 

The  theory  of  international  value,  as  it  has  been  success- 
fully developed  by  the  classical  economists,  is  nothing  but 
an  application,  although  an  exceedingly  complicated  one, 
of  the  general  law  of  value.2  The  elements  that  enter  into 
the  equation  of  international  demand  are  so  numerous  and 
so  complex  that  an  investigation  of  the  actual  effects  of 
a  tax  upon  any  one  class  of  commodities  would  require  for 
its  proper  solution  not  only  an  acquaintance  with  the  details 
of  the  theory  itself,  but  also  an  intimate  knowledge  of  all  the 
forces  influencing  the  supply  of,  and  the  demand  for,  the 
commodities  affected  in  the  two  countries  immediately  con- 
cerned as  well  as  in  all  the  other  countries  that  constitute 

1  Above,  pp.  270-294. 

2  The  most  successful  restatements  of  the  theory  by  modern  authors  are  to 
be  found  in  Bastable,  The  Theory  of  International  Trade,  "with  Some  of  its  Appli- 
cations to  Economic  Policy,  2d  ed.,  1897,  and  Edgeworth,  "The  Theory  of  Inter- 
national Values,"  a  series  of  articles  in  the  Economic  Journal,  iv  (1894),  pp. 
35-50,  424-443,  606-638.     The  particular  question  of  the  shifting  of  a  tariff  tax 
was  treated  by  Professor  Bastable  in  his  "  Incidence  and  Effects  of  Import  and 
Export  Duties,"  in  the  Report  of  the  British  Association  for  1889,  pp.  440  et  seq+ 


Other  Taxes  301 

the  world  market.1  Among  the  considerations  affecting  the 
problem  of  the  incidence  of  a  tax  on  imports  or  exports,  the 
following  are  the  more  important :  — 

(i)  To  what  extent  does  the  exporting  country  control 
the  supply  of  the  commodity  ?  (2)  To  what  extent  does 
the  importing  country  constitute  the  sole  market  for  the 
commodity  ?  (3)  To  what  extent  can  the  commodity  in 
question  be  produced  at  home  ?  (4)  What  is  the  ratio  of 
product  to  cost  ?  (5)  To  what  extent  is  the  demand  elastic  ? 

Let  us  take  up  first  the  questions  connected  with  an 
import  duty.  The  imposition  of  the  tax  may  be  considered, 
in  ordinary  cases,  as  an  addition  to  the  cost  of  production, 
and  as  such  increases  the  price  of  the  article  in  the  importing 
country  by  the  amount  of  the  duty.  Under  such  conditions 
it  is  true  that  "  a  tariff  is  a  tax,"  and  that  it  falls  on  the  con- 
sumer. This  conclusion  is  based  on  the  assumption  that  the 
producers  do  not  bear  any  of  the  tax;  that,  although  the 
sales  necessarily  fall  off  more  or  less,  according  as  the  de- 
mand is  sensitive  or  not,  by  reason  of  the  increased  price, 
the  producers  find  an  outlet  for  their  goods  in  some  other 
country,  so  as  to  recompense  them  for  the  partial  loss  of  the 
market  in  the  country  which  imposes  the  tax. 

This  assumption,  however,  is  not  always  correct.  It  may 
happen  that  the  importing  country  constitutes  either  the  sole 
market  for  the  commodity,  or  such  an  important  part  of  the 
market  that  the  producer  finds  it  impossible  or  difficult  to 
extend  his  sales  in  other  countries.  To  the  extent  that  this 
is  true,  the  producer  finds  it  to  his  interest  to  avoid  any  sub- 
stantial diminution  of  the  demand  in  his  chief  market.  This 
can  be  accomplished,  however,  only  by  his  consenting  to  bear 
a  portion  of  the  tax  himself.  The  case  that  is  most  favorable 

1  As  against  those  who  expect  a  precise  answer  to  every  practical  problem  of 
the  effect  of  a  tariff,  the  statement  of  Professor  Nicholson  seems  almost  justifiable, 
that  in  many  cases  "  the  only  answer  is  that  an  answer  is  impossible."  In  another 
place  he  says  that  "  the  incidence  of  import  and  export  duties,  especially  when 
the  indirect  effects  are  considered,  is  the  most  complicated  and  difficult  problem 
in  economics."  —  "  Tariffs  and  International  Commerce."  By  J.  S.  Nicholson. 
In  the  Scottish  Geographical  Magazine,  September,  1891. 


302          Shifting  and  Incidence  of  Taxation 

to  the  consumer  in  the  importing  country  is :  first,  that  the 
importing  country  constitutes  the  sole  market  for  the  com- 
modity; and,  second,  that  the  demand  for  the  commodity  is 
so  very  elastic  that  a  slight  increase  of  price  causes  a  very 
great  diminution  in  the  sales.  But  from  this  very  exceptional 
case,  where  the  producer  tends  to  bear  a  large  share  of  the 
tax,  down  to  the  ordinary  case,  where  the  consumer  bears  the 
whole  of  the  tax,  there  are  all  kinds  of  gradations. 

Another  very  important  element  in  the  problem  is  the 
extent  to  which  the  home  production  in  the  importing  country 
may  fill  the  gap  caused  by  the  diminution  in  the  imports  from 
the  exporting  country.  The  ordinary  reasoning  that  "  a  tariff 
is  a  tax  "  is  based  on  the  assumption,  as  we  have  seen,  that 
the  equilibrium  will  be  reached  when  the  decreased  supply 
from  the  foreign  country  sells  at  the  increased  price.  If  the 
home  country  cannot  produce  the  article  at  all  —  that  is,  if 
the  exporting  country  has  a  monopoly  of  the  supply  —  this 
assumption  is  valid.  But  if  the  home  country  has  hitherto 
been  prevented  from  producing  the  article  solely  because  the 
price  has  been  too  low  to  admit  of  profits,  the  degree  to  which 
home  production  can  round  out  the  supply  depends  entirely 
on  the  extent  to  which  the  price  rises.  Suppose  that  an  im- 
ported commodity  can  be  produced  abroad  so  as  to  sell  in  the 
importing  country  at  $10.00,  while  it  can  be  produced  in  the 
importing  country  only  at  $12.50.  If  a  tax  of  $2.00  per  unit  is 
imposed,  other  things  being  assumed  as  equal,  the  price  will 
rise  to  $12.00,  and  the  demand  will  fall  off.  But  suppose  that 
the  importing  country  can  now  furnish  a  part  of  the  supply, 
and  because  of  the  larger  output  will  be  able  to  produce  with 
profit  at  $11.00.  Notwithstanding  the  tax  of  $2.00,  the  price 
cannot  rise  above  $i  i.oo,  the  demand  will  not  fall  off  as  much 
as  before,  and  the  tax  will  be  divided  between  the  foreign 
producer  and  the  home  consumer.  The  extent  to  which  the 
home  producer  can  capture  a  part  of  the  market  depends, 
among  other  things,  upon  the  ratio  of  product  to  cost.  If  the 
commodity  is  produced  at  home  under  the  law  of  increasing 
cost,  which  as  we  have  seen  is  the  usual  case  in  competitive 


Other  Taxes  303 

industries,  the  chance  of  the  home  producer  is  not  so  good ; 
if  under  the  law  of  decreasing  cost,  which  as  we  know 
implies  a  trend  toward  monopoly,  his  chances  are  better. 
But  it  is  obvious  that  cases  may  arise  where  it  is  not  true 
that  "  the  tariff  is  a  tax  "  in  the  sense  that  the  whole  burden 
of  an  import  duty  is  necessarily  borne  by  the  consumer.1 

The  indirect  effects  of  an  import  duty  are  interesting,  but 
lie  beyond  the  scope  of  this  inquiry.  From  the  point  of  view 
of  revenue,  it  is  clear  that  the  greater  the  supply  that  is 
captured  by  the  home  producer,  the  less  will  be  the  proceeds 
of  the  tax.  If  the  foreign  producer  is  entirely  shut  out,  the 
revenue  will  be  zero.  The  amount  of  the  immediate  loss  to 
the  community  in  general  will  thus  depend  on  the  price  at 
which  the  home  producer  can  afford  to  sell.  If,  in  the 
extreme  case  mentioned,  the  home  producer  supplies  the 
entire  market  at  a  price  of  $12.00,  the  government  loses  its 
whole  revenue  from  the  tax,  and  the  consumers  lose  the  entire 
amount  of  the  tax  through  the  increase  of  price.  If,  on  the 
other  hand,  the  price  of  the  home  product  after  the  shutting 
out  of  foreign  competition  and  the  development  of  improved 
processes  at  home  can  be  finally  brought  down  to  a  point 
lower  than  $10.00,  the  revenue  will  indeed  still  be  zero,  but  the 
consumers  will  lose  nothing,  and  the  community  will  have 
gained  the  advantages  resulting  from  an  increase  of  industry. 
This,  however,  brings  us  at  once  to  the  controversy  between 
free  trade  and  protection  —  a  controversy  that  can  be  settled 
only  by  considering  the  wider  and  more  permanent  results  of 
an  international  industrial  policy.  What  concern  us  here  are 
the  immediate  results,  or  the  actual  incidence  of  an  import 
duty. 

In  the  case  of  an  export  duty,  much  the  same  conclusions 

1  This  is  now  recognized  by  the  foremost  writers  on  the  subject.  Cf.  the  quo- 
tations in  Professor  Edgeworth's  article  in  the  Economic  Journal,  iv,  p.  43,  and 
his  own  statements,  ibid.,  pp.  46-48.  The  conclusions  to  which  Professor  Carver 
comes  in  his  article  on  "The  Shifting  of  Taxes"  in  the  Yale  Review,  v,  p.  271, 
are  therefore  really  not  "opposed  to  the  orthodox  teachings"  on  the  subject, 
as  he  assumes,  if  by  orthodoxy  we  mean  the  views  commonly  held  to  be 
authoritative. 


304          Shifting  and  Incidence  of  Taxation 

can  be  reached.  An  export  duty  ordinarily  falls  on  the  citi- 
zen of  the  exporting  country.  But  if  the  duty  is  imposed  on 
a  commodity  of  which  the  country  has  a  monopoly,  and 
still  more  if  the  demand  for  this  monopolized  commodity  is 
comparatively  persistent,  it  may  happen  that  an  export  tax 
will  be  shifted  to  the  foreign  consumer.  It  is  noteworthy 
that  the  chief  examples  of  export  duties  still  to  be  found  are 
those  of  duties  on  articles  which  approach  the  conditions  of 
monopoly  supply.  Such  are,  for  example,  the  export  duties 
on  opium  in  India  and  on  guano  in  Peru.  But  it  is  to  be  ob- 
served that  the  cases  of  perfectly  stable  demand,  even  for  a 
monopolized  article,  are  exceedingly  rare.1  There  is  scarcely 
any  commodity  for  which  some  substitute,  even  though  it  be 
incomplete,  cannot  be  found.  To  the  extent  that  this  is  true, 
more  and  more  of  the  export  duty  will  be  borne  by  the  mo- 
nopolist exporter  for  fear  that  the  decrease  of  sales,  even  at  a 
higher  price,  will  lower  his  maximum  monopoly  revenue. 

5.    Stamp  Taxes 

Stamp  taxes  are  usually  supposed  to  be  shifted  to  the  con- 
sumer or  purchaser.  This  does  not,  however,  necessarily  fol- 
low. If  the  stamp  taxes  are  imposed  on  the  sale  of  particular 
commodities  —  as,  for  instance,  the  American  internal  revenue 
duty  on  proprietary  medicines  —  we  are  confronted  by  what 
is  an  ordinary  form  of  the  taxation  of  profits  discussed  above. 
This  is  equally  true  when  the  so-called  stamp  taxes  are  noth- 
ing but  taxes  on  production,  levied  by  means  of  a  stamp,  as 
in  the  American  taxes  on  tobacco,  whiskey  and  beer.  Stamp 
taxes  here  do  not  really  form  a  distinct  kind  of  taxes. 

If  the  stamp  taxes  are,  however,  taxes  on  transportation 
and  communication,  much  again  will  depend  on  the  height  of 
the  tax,  the  character  of  the  business  and  the  elasticity  of 
the  demand.  For  instance,  in  the  case  of  the  American  war 
revenue  taxes  of  1 898,  the  one  cent  tax  on  telegraph  messages 
and  on  express  receipts  has  been  shifted  to  the  consumer, 

1  See  above,  pp.  189-191. 


Other  Taxes  305 

partly  because  the  tax  was  high  enough,  from  the  standpoint 
of  the  telegraph  and  express  companies,  to  warrant  an  attempt 
to  throw  it  on  the  sender  of  the  message  or  parcel,  and  partly 
because  the  tax  was  at  the  same  time  so  low  that  the  con- 
sumer did  not  care  to  abandon  the  use  of  those  particular 
media  of  communication  and  transportation.  The  telegraph 
is  used  in  America  almost  exclusively  for  purposes  of  busi- 
ness ;  and  the  service  may  to  a  large  extent  be  classed  as  a 
necessary,  with  comparative  inelasticity  of  demand.  The  ex- 
press companies,  moreover,  even  in  that  part  of  their  transac- 
tion where  they  come  into  competition  with  the  postal  service, 
do  not  run  much  risk  of  reducing  their  business  by  adding 
the  tax  to  the  price. 

On  the  other  hand,  the  one  cent  tax  on  parlor  car  tickets 
has  been  borne  by  the  transportation  companies,  partly  be- 
cause of  their  fear  of  losing  their  patronage,  partly  because 
the  tax  constitutes  a  less  important  percentage  of  the  price 
than  in  the  preceding  cases.  From  the  consumer's  stand- 
point, in  the  case  of  a  moderate  comfort  like  the  parlor  car 
service,  even  a  slight  addition  to  price  may  mean  a  considera- 
ble diminution  of  demand  for  the  service.  From  the  pro- 
ducer's standpoint,  one  cent  on  a  sum  ranging  from  two  to 
four  dollars  (the  average  price  of  a  parlor  car  ticket)  is  of 
considerably  less  consequence  than  one  cent  on  a  sum  rang- 
ing from  twenty-five  to  forty  cents  (the  average  price  of  a 
telegraph  message  or  express  shipment).  Even  here,  how- 
ever, it  is  open  to  question  whether  the  conditions  of  com- 
parative elasticity  of  demand  and  supply  will  not  change  to 
such  an  extent  as  to  cause  the  tax  on  parlor  car  tickets  to  be 
shifted  to  the  consumer,  just  as  the  ordinary  tax  on  railroad 
tickets  in  the  continental  countries  of  Europe  is  also  borne 
by  the  passenger. 

Finally,  when  a  substantial  tax  is  imposed  on  an  act  of 
communication  or  of  transportation,  where  the  demand  is 
sensitive,  the  tax  may,  in  rare  instances,  seem  to  have  the 
very  exceptional  result  of  lowering  prices.  When  the  United 
States,  for  instance,  imposed,  in  1898,  a  one  cent  tax  on  ordi- 


306          Shifting  and  Incidence  of  Taxation 

nary  fifteen  cent  telephone  messages,  the  telephone  com- 
panies were  so  apprehensive  of  diminishing  their  maximum 
monopoly  revenue,  that  they  not  only  decided  to  refrain  from 
adding  the  tax  to  the  price,  but  also  resolved  to  evade  the 
tax  entirely  by  reducing  telephone  messages  to  a  price  below 
fifteen  cents.  Ordinarily,  however,  a  monopoly  like  the  tele- 
phone company  would  be  presumed  to  have  realized  its 
maximum  advantage  at  the  price  current  before  the  imposi- 
tion of  the  tax.  The  tax  may,  indeed,  in  this  particular  case, 
have  led  the  company  to  consider  the  whole  matter  anew ; 
but,  after  all,  the  reduction  of  the  price  would  have  ulti- 
mately come  about,  tax  or  no  tax.  The  tax,  therefore,  was 
the  occasion,  rather  than  the  cause,  of  lower  prices. 

When  the  stamp  taxes  are  taxes  on  acts  or  transactions, 
the  incidence  will  depend  on  whether  these  transactions  are 
of  a  commercial  character.  In  the  case  of  judicial  taxes, 
sometimes  termed  court  costs  and  fees,  there  is  evidently  no 
one  to  whom  the  taxpayer  can  shift  the  burden.  In  the 
case  of  ordinary  commercial  transactions,  the  important  con- 
siderations, again,  will  be  the  height  of  the  tax  and  the 
elasticity  of  the  demand.  When  the  tax  is  very  insignificant, 
as  in  the  case  of  a  tax  on  the  ordinary  receipts  of  sales,  the 
merchant  is  very  apt  to  bear  the  tax  himself.  When  the  tax 
is  sufficiently  large  to  make  it  an  inducement  to  the  seller  to 
shift  the  burden,  the  tax,  if  imposed  on  him,  will  usually  be 
shifted  to  the  buyer,  except  to  the  extent  that  this  shifting 
will  diminish  the  number  of  transactions  and  thus  induce  the 
seller  to  bear  a  part  of  the  burden  himself.  In  such  cases, 
the  burden  is  apt  to  be  divided  in  accordance  with  the  rela- 
tive elasticity  of  demand  and  supply.  The  net  result  may 
then  be  a  diminution  of  transactions.  The  chief  reason,  for 
example,  why  there  exists  in  the  French  cities  no  such  impor- 
tant class  of  real  estate  brokers  and  speculative  builders  as 
in  the  American  cities,  is  to  be  found  in  the  high  French 
taxes  on  transfers  of  land.  Finally,  when  the  stamp  taxes 
are  imposed  on  the  transfers  of  capital,  as  between  lender 
and  borrower,  it  is  clear  that  the  tax  will  be  largely  borne  by 


Other  Taxes  307 

the  borrower,  in  accordance  with  the  principles  laid  down 
above. 

6.   Income  Taxes 

The  incidence  of  an  income  tax  has  been  much  discussed. 
One  writer  has  even  attempted  to  prove  that  an  equal  tax  on 
incomes  is  the  only  tax  that  cannot  be  shifted.1  He  draws 
the  conclusion  that  the  income  tax  must  therefore  be  the 
ideal  —  the  only  possible  realization  of  the  principle  of 
equality  of  taxation.  This  contention,  however,  is  open  to 
criticism  for  two  reasons.  In  the  first  place,  we  have  seen 
that  there  are  many  other  taxes  which  cannot  be  shifted  — 
like  the  poll  tax,  taxes  on  inheritances,  on  rent,  on  salaries, 
and  certain  taxes  on  monopolies.  Secondly,  and  more  impor- 
tant, it  is  untrue  that  the  income  tax,  as  frequently  levied, 
cannot  be  shifted. 

In  some  countries,  as  in  England,  the  income  tax  is  simply 
a  combination  of  taxes  on  the  separate  ingredients  of  income, 
and  it  often  happens  that  the  so-called  income  tax  is,  in  real- 
ity, a  system  of  taxes  on  gross  revenue  or  gross  receipts.  In 
such  cases  there  can  be  no  question  that  each  part  of  the 
income  tax  follows  the  laws  of  incidence  of  the  respective  sepa- 
rate taxes,  so  that  there  is,  in  respect  of  incidence,  practically 
no  difference  between  a  so-called  income  tax  and  the  other 
direct  taxes  of  which  the  income  tax  is  substantially  composed. 
If  the  total  income  is  composed  of  wages,  the  law  of  incidence 
cannot  be  different,  whether  we  call  the  share  income  or 
wages.  If  the  total  income  is  composed  of  profits  in  the 
broad  sense,  the  tax  will  be  shifted  or  not,  according  to  the 
rules  of  incidence  that  govern  a  tax  on  profits.  If  the  income 
is  derived  from  house  rents,  the  final  burden  will  be  borne  in 
accordance  with  the  principles  laid  down  in  discussing  the  tax 
on  real  estate.  If  some  of  the  separate  parts  are  shifted,  the 
whole  cannot  possibly  remain  unshifted. 

In  those  cases,  indeed,  where  the  tax  is  levied  on  pure 
income  in  the  strict  economic  sense,  the  tax  is  substantially 

1  Kaizl,  Die  Lehre  von  der  Uebcrwahung  der  Steuern>  pp.  ioi-il8. 


308          Shifting  and  Incidence  of  Taxation 

a  tax  on  economic  rent,  plus  a  tax  on  net  profits,  plus  a  tax 
on  wages.  Now,  the  tax  on  economic  rent  and  on  net  profits 
cannot  be  shifted ;  and,  therefore,  as  regards  all  members  of 
the  community  except  the  wage-earners,  a  tax  levied  on  pure 
income  tends  to  stay  where  it  is  imposed.  So  far  as  the  lowest 
incomes  are  exempted  from  the  tax,  the  tendency  would  also 
be  for  the  income  tax  on  the  laborers  to  stay  where  it  is  put. 
But,  even  in  such  cases,  there  is  no  absolute  certainty  that 
the  income  tax  will  not  be  shifted.  In  actual  life,  of  course, 
as  we  very  rarely  find  either  a  pure  income  tax  or  an  equal 
income  tax,  we  cannot  safely  rely  on  the  complete  non-trans- 
ferability  of  the  tax.  Nevertheless,  to  the  extent  that  the  tax 
;  may  be  considered  one  on  surplus,  rather  than  on  margin,  the 
chances  are  that  the  tax  will  remain  where  it  is  originally 
placed. 

This  entire  question,  however,  like  that  of  the  incidence 

of  stamp  duties  and  taxes  on  exchange,  as  well  as  the  wider 

i'     problem  of  the  shifting  of  all  taxes  from  the  consumer  onward, 

A     practically  resolves  itself  into  the  old  problem  whether  a  tax 

C    \    is  to  be  regarded  as  a  cost  of  production  or  an  outlay  for 

consumption. 

In  all  the  cases  that  we  have  thus  far  discussed  we  have 
traced  the  shifting  of  taxes  down  to  the  consumer.  Certain 
taxes,  we  have  found,  are  never  shifted ;  other  taxes  are  some- 
times shifted  in  whole  or  in  part  to  the  consumer.  But  will 
not  the  consumer  in  turn  shift  the  burden  to  some  one  else  ? 
Here  we  must  remember  the  theory  of  Canard,  Thiers  and 
Stein,  that  every  tax  is  shifted  on  everybody  —  that  every 
consumer  will  again  shift  the  tax  on  a  third  party,  and  that 
this  third  party  who  is  again  a  consumer  will  shift  it  to  some 
one  else  and  so  on  ad  infinitum.  Since  every  one  is  a  con- 
sumer, every  one  will  thus  bear  a  portion  of  the  taxes  that 
everybody  else  pays. 

The  error  of  this  doctrine  lies  in  the  failure  to  distinguish 
between  productive  and  unproductive  consumption.  If  every 
taxpayer  were  engaged  in  production  and  paid  taxes  only  on 
what  he  employed  for  the  purposes  of  further  production, 


Other  Taxes  309 

there  might  be  some  truth  in  the  foregoing  doctrine.  Many 
taxes  fall  on  individuals  who  are  not  producers  at  all,  so 
that  there  is  no  question  of  any  shifting  to  the  consumer, 
while  each  consumer  uses  only  a  part  of  the  commodities 
consumed  by  him  for  productive  purposes.  Every  one  con- 
sumes unproductively.  Whatever  an  individual  spends  on 
luxuries,  or  on  anything  but  necessaries,  is  an  expenditure 
which,  so  far  as  he  is  concerned,  does  not  give  rise  to  any 
further  relations  of  producer  and  consumer.  If  the  consumer, 
on  whom  a  certain  tax  has  been  shifted,  spends  his  income 
in  buying  diamonds,  on  whom  can  he  possibly  shift  the  tax  ? 
Not  on  the  diamond  dealer,  because  he  does  not  stand  in  any 
relation  of  producer  to  the  dealer.  He  may  indeed  buy  fewer 
diamonds  than  he  would  have  bought  if  the  tax  had  not  been 
imposed,  but  he  cannot  shift  the  tax.  The  shifting  of  the 
tax  is  not  the  same  thing  as  the  result  of  the  tax.  What 
is  true  of  the  diamond  purchaser  is  true  of  all  who  consume 
for  purposes  other  than  those  of  production.  So  that  there 
is  no  indefinite  diffusion  of  taxes. 

Only  so  far  as  the  individual  purchases  or  consumes  a  com- 
modity in  order  to  produce  other  commodities  with  it,  will  the 
condition  arise  under  which  he  as  producer  will  be  able  to 
shift  the  tax  proper  on  to  another  consumer.  Here,  again, 
the  possible  conditions  are  not  necessarily  the  actual  facts. 
Just  as  only  some  producers  —  and  even  they  only  under 
certain  circumstances  —  will  be  able  to  shift  the  tax,  so  only 
some  of  the  consumers  (who  must  in  this  respect  be  regarded 
as  producers)  —  and  they  only  in  part  —  will  be  able  to  shift 
the  tax.  Hence  the  theory  of  the  general  diffusion  of  taxa- 
tion is  untenable,  whether  the  theory  asserts  that  all  taxes  are 
equally  spread  throughout  the  community,  or  that  they  will 
inevitably  rest  at  last  on  some  one  class. 


CHAPTER  VIII 

CONCLUSION 

WE  come  now  to  the  close  of  our  investigation,  and  to  the 
consideration  of  the  question  whether  the  theory  of  incidence 
contains  by  inference  any  advice  for  the  statesman  engaged 
in  framing  a  scheme  of  taxation.  What  is  the  practical 
result  of  our  discussion  ?  What  weight  should  be  attached 
to  theories  of  incidence  in  constructing  a  positive  system  of 
public  contributions  ? 

In  the  first  place,  we  have  seen  that  there  is  no  room  for 
optimism  of  theory.  The  legislator  cannot  rightfully  shut 
his  ears  to  any  cry  for  reform,  on  the  plea  that  all  old  taxes 
tend  to  become  good  taxes.  Nor  dare  he  complacently 
f  grasp  any  new  source  of  revenue,  on  the  assumption  that 
all  taxes,  no  matter  how  levied,  will  ultimately  be  borne  by 
the  community  at  large.  The  theory  that  "  all  taxes  fall  on 
everybody"  and  are  therefore  just,  is  incorrect  because  it 
assumes  that  all  taxes  are  a  part  of  the  cost  of  production. 
This  assumption  is  untrue,  because  some  taxes  are  levied  on 
persons,  or  property,  or  revenue,  where  there  is  no  further 
relation  of  producer  and  consumer.  Even  if  all  taxes  were 
to  be  regarded  as  additions  to  the  cost  of  production,  it  would 
not  follow  that  the  taxes  would  be  shifted  to  the  consumers 
in  any  definite  proportion  to  their  faculty  or  ability  to  pay, 
which  is  the  only  test  of  justice  in  taxation.  If  all  taxes  did 
really  fall  on  everybody,  taxation  would  be  proportional  to 
expenditure;  and  expenditure  is,  of  all  bases  of  taxation, 
the  least  equitable.  Thus  the  optimistic  theory  must  be 
discarded :  first,  because  the  general  diffusion  doctrine  is 
untrue ;  and,  second,  because  if  it  were  true,  it  would  cause 

310 


Conclusion  311 

injustice.     The  legislator  cannot  shirk  his  duty  in  this  easy- 
going way. 

On  the  other  hand,  there  is  no  good  reason  for  pessimism 
or  agnosticism.  Some  writers,  as  we  know,  claim  that  it  is 
useless  to  construct  any  system  of  taxation,  because  it  is  im- 
possible to  foresee  the  ultimate  consequences  of  any  tax. 
But  this  hopeless  attitude  we  have  found  to  be  mistaken.  It 
is  true,  indeed,  that  the  distinction  between  direct  and  indi- 
rect taxes  is  robbed  of  much  of  its  value ;  for  many  of  the 
so-called  direct  taxes  may  be  shifted  in  the  same  way  as 
the  so-called  indirect  taxes.  In  common  parlance  the  dis- 
tinction between  direct  and  indirect  taxes  is  practically  rele- 
gated to  the  mind  of  the  legislator :  what  he  wishes  to  have 
borne  by  the  original  taxpayer  is  called  a  direct  tax,  what  he 
intends  to  have  borne  by  some  one  else  than  the  original 
taxpayer  is  called  indirect.  Unfortunately  the  intention  of 
the  legislator  is  not  identical  with  the  actual  result.  We 
must,  then,  either  revise  our  nomenclature  or  declare  the 
present  distinction  of  little  value. 

While  the  mere  fact  that  a  tax  is  called  a  direct  tax  does 
not  show  that  it  may  not  be  shifted,  the  preceding  discussion 
has  shown  that  certain  general  tendencies  may  be  clearly 
defined.  What  are  these  general  tendencies  of  incidence? 
They  may  be  summed  up  under  four  heads. 

In  the  first  place  all  taxable  objects  may  be  looked  at  from 
the  standpoint  of  property  or  from  that  of  revenue.  Re- 
garded from  the  former  point  of  view,  we  have  found  that 
unequal  or  partial  taxes  on  revenue-yielding  property  tend 
to  be  a  charge  neither  on  the  community  nor  on  the  future 
possessors,  but  only  on  the  holders  at  the  time  the  tax  is 
imposed.  The  capitalization  theory  comes  into  play  when- 
ever a  new  tax  is  assessed  on  certain  classes  of  property  or 
the  rate  of  an  existing  tax  is  altered.  The  tax  is  never 
shifted  onward,  but  its  results  are  serious,  whether  for  good 
or  for  evil,  to  the  class  of  initial  owners  alone.  The  lesson 
which  the  capitalization  theory  has  to  teach  is  that  the  evils 
of  inequality  of  taxation  are  doubly  intensified  when  the 


312          Shifting  and  Incidence  of  Taxation 

inequality  attaches  to  revenue-yielding  property,  and  that  the 
ultimate  equalization  of  the  burden,  if  it  come  at  all,  can  be 
attained  only  at  the  expense  of  the  unfortunate  present 
holders. 

Secondly,  if  we  look  at  taxable  objects  from  the  standpoint 
of  revenue,  we  have  found  that  there  are  only  two  kinds  of 
revenue  on  which  a  tax,  when  once  imposed,  necessarily 
remains.  These  are  economic  rent  and  pure  profits,  or,  to 
use  a  term  which  has  sometimes  been  adopted  to  include 
both  elements,  economic  surplus.  A  tax  on  surplus  can 
never  be  shifted,  because  surplus  is  not  a  part  of  cost  of  pro- 
duction, but  the  result  of  process  of  production.  Thus,  taxes 
on  inheritance,  gifts,  gains  from  speculation,  etc.,  cannot  be 
shifted,  because  they  are  a  part  of  surplus,  of  pure  profits. 
If  it  were  possible,  then,  to  find  a  class  whose  revenue  con- 
sisted exclusively  of  economic  rent  and  pure  profits,  the 
legislator  might  single  out  this  class  either  for  taxation  or 
for  exemption,  according  as  it  was  the  general  policy  to 
have  taxes  paid  directly  or  indirectly. 

In  the  third  place,  all  remaining  taxes  tend,  in  the  abstract, 
to  be  shifted,  until  they  fall  ultimately  on  this  surplus,  be- 
cause all  other  taxes  tend  to  form  a  part  of  cost  of  produc- 
tion. The  conclusion  might,  therefore,  be  drawn,  that  taxes 
should  be  levied  either  on  net  profits  alone  or  on  commodi- 
ties —  in  the  latter  case,  falling  in  the  long  run  on  profits, 
but  without  the  knowledge  of  the  profit-receiver.  In  either 
case,  taxes  on  wages  would  be  regarded  as  part  of  the  cost  of 
production,  and  would  be  shifted  from  wages  to  profits. 

Such  conclusions  rest  on  doctrines  very  like  those  that  we 
discussed  under  the  head  of  "absolute  theories."  They  tend 
to  be  true  only  in  an  isolated  community  where  there  is  com- 
plete mobility  of  labor  and  capital,  and  where  the  economic 
man  reigns  supreme.  In  actual  life,  these  tendencies  are 
met  by  the  counter  tendencies  of  "economic  friction." 
Taxes  on  land  often  tend  to  stay  where  they  are  put,  be- 
cause of  international  relations  and  the  lack  of  absolute 
transferability  of  capital;  taxes  on  wages,  if  cunningly  im- 


Conclusion  313 

posed,  may  lead  to  a  lowering,  instead  of  to  a  heightening, 
of  the  standard  of  life ;  taxes  on  occupiers  of  houses  are  not 
necessarily  shifted  to  the  owners ;  and  so  on. 

Fourthly,  above  all,  we  must  distinguish  between  kinds  of 
revenue  and  classes  of  society.  Economic  surplus,  pure 
rent  and  pure  profit  may  mean  the  entire  revenue  of  some 
individuals,  but  only  part  of  the  revenue  of  others.  As  we 
have  already  pointed  out,  the  mere  fact  that  a  tax  may  be 
shifted  by  a  class  does  not  show  that  the  tax  may  not  press 
very  unequally  upon  individual  members  of  the  class.  If 
we  thus  change  the  point  of  view  from  social  classes  to  indi- 
viduals, we  see  how  untenable  is  the  argument  that  the  best 
tax  is  an  indirect  tax,  because  it  will  ultimately  be  shifted  to 
the  economic  surplus  of  society.  For  such  a  tax  can  get  to 
economic  surplus  only  through  the  productive  consumption 
of  individuals  —  that  is,  through  expenditures  which  again 
create  relations  of  producer  and  consumer.  But  as  we  have 
just  pointed  out,  not  all  consumption  is  productive  consump- 
tion ;  and  expenditure  in  general  is  the  least  equitable  basis 
of  taxation,  because  it  always  bears  with  greater  weight  upon 
the  less  fortunate  or  more  deserving  members  of  any  social 
class. 

The  advice,  therefore,  which  the  correct  theory  of  inci- 
dence has  to  offer  to  the  legislator  is :  Choose  primarily  those 
taxes  the  results  of  which  can  be  foretold  with  some  degree  of 
accuracy ;  at  all  events,  take  some  taxes  where  the  chances 
of  shifting  are  very  slight,  and  take,  on  the  other  hand,  taxes 
which  will  be  shifted  in  their  entirety.  In  the  former  class 
are  included  certain  taxes  on  monopolies,  net  profits,  inheri- 
tances and  definite  forms  of  property  and  income.  In  the 
latter  class  are  included  taxes  on  commodities  in  the  shape 
of  import  duties,  certain  excise  taxes  and  licenses,  and  taxes 
on  gross  receipts  of  corporations.  If  the  legislator  desires 
to  reach  certain  classes  of  society  directly,  let  him  choose  the 
first  kind  of  taxes ;  if  he  desires  to  have  his  taxes  paid  una- 
wares, let  him  choose  the  second.  If  neither  the  one  nor  the 
other  kind  of  taxes  suffices  for  the  public  revenue,  the  legis- 


314          Shifting  and  Incidence  of  Taxation 

lator  will  be  compelled,  as  is  often  the  case,  to  resort  to  taxes, 
the  incidence  of  which  is  more  uncertain,  and  where  the 
intentions  of  the  legislator  may  be  entirely  frustrated  by 
the  actual  course  of  events. 

The  theory  of  incidence  has  therefore  important,  but  by 
no  means  final,  advice  to  offer  in  the  elaboration  of  a  tax 
system.  It  does  not  by  any  means  render  unnecessary  the 
study  of  the  principles  of  justice  and  equality  in  taxation. 
If  neither  the  optimistic,  nor  the  pessimistic,  nor  the  agnostic 
theory  of  incidence  can  be  any  longer  upheld,  the  student  of 
public  finance  must  seek  to  elaborate  the  rules  of  equitable 
taxation  without  any  reliance  upon  the  automatic  operation 
of  presumed  absolute  laws.  He  must  endeavor  to  make  a 
choice  of  public  revenues  which  in  themselves  satisfy  the 
requirement  of  the  principles  of  economic  justice ;  and  in  so 
doing  he  may  be  guided  by  those  principles  of  incidence, 
but  only  by  those,  which  are  definite  and  well  ascertained. 
The  theory  of  shifting  of  taxation  is,  therefore,  an  aid  to,  but 
not  a  substitute  for,  the  study  of  economic  justice.  As  has 
been  well  said,  the  doctrine  of  incidence  is  neither  the  arch- 
angel nor  the  archfiend  of  the  science  of  finance. 


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B.  ANONYMOUS  WORKS 

(Arranged  Chronologically) 

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A  familiar  Discourse  between  George,  a  true-hearted  English  Gentleman, 
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A  Letter  from  a  Member  of  Parliament  for  a  Borough  in  the  West,  to 
a  Noble  Lord  in  his  Neighborhood  there,  concerning  the  Excise-Bill 
and  the  Manner  and  Causes  of  losing  it.  London,  1733. 

A  Letter  from  a  Member  of  Parliament  to  his  Friend  in  the  Country, 
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Laws,  and  shewing,  that  had  the  late  Attempt  succeeded,  it  had  been 
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A  Letter  from  a  Member  of  Parliament  to  his  Friends  in  the  Country  con- 
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A  Letter  from  a  Merchant  of  London  to  a  Member  of  Parliament,  in 
answer  to  a  Letter  from  a  Member  of  Parliament  to  his  Friends  in 
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1733- 

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the  Excise  Bill,  and  yet  re-electing  them  after  their  being  rewarded 
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principal  Cities,  Counties,  Towns  and  Boroughs  in  England  to  their 

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be  destructive  of  Trade  in  general;  2  that  Excises  are  inconsistent 

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Some  Observations  on  National  Treaties  etc.  An  impartial  Inquiry  into 
the  present  Question  concerning  Excise,  in  which  the  Advantages  aris- 
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The  Golden  Fleece.  To  which  is  added,  a  Proposal  for  taking  away  many 
burthensome  Duties  on  some  of  the  most  essential  Necessaries  in  Life, 
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a  State  of  the  Annual  Supplies  of  the  Sinking-Fund  and  of  the 
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UNDATED 

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INDEX  OF  AUTHORS 


Asgill,  J.,  74. 

Ashley,  J.,  53. 

Auspitz  und  Lieben,  1 68. 

Barone,  E.,  172. 

Bastable,  C.  F.,  57,  86,  160,  241,  242, 

299,  300. 

Baudeau,  N.,  95,  106,  138. 
Baxter,  R.  D.,  143. 
Biersack,  H.  L.,  152. 
Blanc-Gilli,  M.,  65. 
Blunden,  G.  H.,  232,  234. 
Boisguillebert,  90. 
Bolles,  A.  S.,  135,  136. 
Brentano,  L.,  31. 
Broglie,  Due  de,  131. 
Buchanan,  D.,  119,  157. 
Burnaby,  A.,  22. 

Canard,  F.,  125-128. 

Cannan,  E.,  234. 

Cantillon,  R.,  75. 

Carver,  T.  N.,  197,  303. 

Gary,  J.,  26,  40,  41. 

Chamberlayne,  E.,  55. 

Cherbuliez,  A.  E.,  128,  141. 

Child,  J.,  39,  40. 

Cleeve,  B.,  64. 

Cliffe-Leslie,  T.  E.,  159,  255,  267,  290. 

Cohn,  G.,  156. 

Conigliani,  C.  A.,  170-172. 

Cooley,  T.  M.,  133. 

Courcelle-Seneuil,  J.  C.,  128. 

Cournot,  A.,  144,  165,  166,  276,  281. 

Cradock,  F.,  13. 

Craig,  J.,  138,  140,  142. 

Culpeper,  T.,  13,  14,  22,  66. 

Cunningham,  W.,  37,  57. 


D'Anvers,  C,  48,  51. 

Davenant,  C,  67,  73,  74,  75. 

Decker,  M.,  57,  60,  6l. 

De  Foe,  D.,  26,  67. 

De  la  Court,  P.,  34. 

Denis,  H.,  140. 

De  Witt,  J.,  34. 

Dickson,  A.,  123. 

Drake,  J.,  69. 

Dupont  de  Nemours,  95,  104-106,  109. 

Dupuit,  A.  J.  E.  J.,  1 68. 

Edgeworth,  F.  Y.,  172-174,  212,  241, 
242,  253,  274-278,  287,  300,  303. 

Falck,  G.  v.,  7,  165. 
Farrar,  T.  H.,  254. 
Fauquier,  F.,  17,  28,  62. 
Fauveau,  G.,  166. 
Fawcett,  H.,  159,  257,  258,  282. 
Florez-Estrada,  A.,  222,  224. 
Forster,  N.,  44,  59. 
Franklin,  B.,  109,  no. 
Fulda,  F.  K.  v.,  152. 

Galibert,  L.,  222. 

Gamier,  J.,  149. 

Gibbon,  A.,  132. 

Conner,  E.  C.  K.,  57. 

Goschen,  G.  J.,  232,  249,  250. 

Graslin,  L.  F.,  109,  in. 

Graziani,  A.,  160, 241,  274, 276, 277,  287. 

Gregg,  142. 

Gunton,  G.,  283. 

Hamilton,  A.,  109,  no,  133,  134. 
Held,  A.,  161,  162. 
Helferich,  J.  A.  R.  v.,  144. 


335 


336 

Higgs,  H.,  96. 
Hobbes,  T.  12. 
Hock,  C.  F.  v.,  144,  154. 
Hoffmann,  J.  G.,  139. 
Horsley  63. 
Houghton,  J.,  32,  36. 
Hume,  D.,  85,  86. 


Inama-Sternegg,  K.  P.  v.,  90. 

Jakob,  L.  H.  v.,  152. 
Jenkin,  F.  167,  279. 
Jones,  R.,  157. 

Kaizl,  J.,  7,  165,  307. 
Kroncke,  K.,  265. 

Laspeyres,  E.,  34. 

Lassalle,  F.,  163. 

Launhardt,  W.,  168. 

Leroy-Beaulieu,  P.,  no,  III,  141,  151. 

Leser,  E.,  12. 

Le  Trosne,  G.-F.,  107. 

Linden,  Cort  van  der,  1 32. 

Locke,  J.,  71-73,  81,  84,  85. 

Loria,  A.,  287. 

McCulloch,  J.  R.,  158,  159. 

Malchus,  C.  A.  v.,  152. 

Mangoldt,  H.  K.  E.  v.,  145. 

Manley,  T.,  31,  39. 

Mansfield,  Lord,  123. 

Marshall,  A.,  172,  212,  280. 

Martin,  R.  M.,  132. 

Massie,  J.,  44,  63,  64. 

Mill,  J.,  158. 

Mill,  J.  S.,  143,  158,  226,  237,  242,  263, 

282,  295. 

Mirabeau,  Le  Marquis  de,  95,  102,  in. 
Mun,  T.,  13,  14,  28. 
Murhard,  K.,  139,  152. 
Myrbach,  244. 

Nicholson,  J.  S.,  301. 
Nickolls,  J.,  29,  43,  57,  58. 
Noble,  J.,  143. 
Nugent,  R.,  42,  83,  84. 


Index  of  Authors 

Overstone,  Lord,  35,  38,  39. 


Pantaleoni,  M.,  140,  145,  167,  168,  190, 

I97»  235»  240,  262,  265. 
Parieu,  E.  de,  141,  149-151,  282. 
Passy,  H.,  140. 

Petty,  Sir  W.,  18-21,  33,  81,  221. 
Philips,  F.,  25. 

Pierson,  N.  G.,  132,  145,  249. 
Postlethwayt,  M.,  43,  59,  84. 
Prince-Smith,  J.,  155,  156. 
Prittwitz,  M.  v.,  129. 
Proudhon,  P.  J.,  134,  135. 
Prynne,  W.,  25. 
Pulteney,  W.,  29,  48. 
Puynode,  G.  du,  141,  151,  230,  282. 


Quesnay,  F.,  95,  96-102. 

Rau,  K.  H.,  144,  153,  265. 

Reynell,  C.,  82. 

Ricardo,  D.,  117-121,   222,   223,   224, 

242,  282. 

Ricca-Salerno,  12,  90. 
Richardson,  57. 

Riviere,  Mercier  de  la,  95,  102-104,  !"• 
Roberts,  L.,  51. 
Rogers,  J.  E.  Thorold,  254. 
Roscher,  W.,  3,  90,  121,  156. 
Ross,  E.  A.,  218,  287. 

Saint-Peravy,  IO2. 

Sargent,  C.  H.,  234,  257. 

Sartorius,  G.  F.,  139. 

Say,  J.-B.,  139,  140,  146,  147. 

Schaffle,  A.  E.  F.,  145,  156. 

Schall,  K.  F.  v.,  156. 

Schomberg,  A.  C.,  45. 

Schulze-Gavernitz,  30,  34. 

Senior,  N.  W.,  142,  226. 

Shearman,  T.  G.,  164. 

Sheridan,  T.,  23. 

Sherman,  I.,  133. 

Sidgwick,  H.,  143,  237. 

Sinclair,  Sir  J.,  12. 

Sismondi,  S.  de,  147-149. 

Smith,  Adam,  57,  113-117,  252,  282,  295. 


Index  of  Authors 


337 


Soden,  J.  G.,  152. 
Spahr,  C.  B.,  260. 
Stein,  L.  v.,  131,  141. 
Steuart,  J.,  85,  87-89. 
Stewart,  D.,  89. 
Swift,  Dean,  29. 

Temple,  W.,  37,  38. 
Temple,  Sir  W.,  33,  34. 
Thiers,  A.,  129-131. 
Thiinen,  J.  H.  v.,  152,  226,  227. 
Tracy,  A.  L.  C.,  Destutt  de,  140. 
Tucker,  J.,  35,  45,  57,  58. 
Turgot,  G.  F.,  95,  107-109,  III,  138, 
266. 

Vanderlint,  J.,  42,  76,  77. 
Vauban,  M.,  90. 
z 


Verri,  P.,  122,  123,  125. 
Vignes,  £.,151. 
Vocke,  W.,  156. 

Wagner,  A.,  156. 

Wagstaffe,  W.,  69. 

Walker,  F.  A.,  123,  133,  147. 

Walpole,  R,  II,  48,  79. 

Walras,  L.,  141,  168,  169,  189,  190. 

Waterhouse,  W.,  15. 

Webb,  S.,  241,  254,  282. 

Wells,  D.  A.,  133. 

Wicksell,  K.,  169,  170,  276,  277,  287. 

Wolowski,  141. 

Wood,  W.,  75. 

Young,  A.,  34,  36,  57,  65,  86,  89,  in, 
Young,  J.,  124,  125,  138,  142. 


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